Cloudastructure (NASDAQ: CSAI) faces cash strain and Nasdaq listing risk
Cloudastructure, Inc. reported continued operating losses and tight liquidity for the six months ended June 30, 2026. Revenue was $2.55 million, up from $1.82 million a year earlier, driven by higher subscription revenue, but the company recorded a net loss of $4.51 million and negative operating cash flow of $4.46 million.
Cash and cash equivalents fell to $3.81 million from $8.45 million at year-end, with an accumulated deficit of about $55.8 million. Management states that recurring losses, cash burn and dependence on external financing raise substantial doubt about the company’s ability to continue as a going concern. Access to its equity line and ATM facility depends on maintaining a Nasdaq listing.
The company corrected immaterial past errors related to embedded derivative liabilities and mezzanine classification of preferred stock, revising prior-period financials without restating them. An amendment to the Series 2 preferred terms eliminated the derivative, reducing the related liability from $1.32 million at December 31, 2025 to zero. Cloudastructure recently effected a 1‑for‑30 reverse stock split and has regained compliance with Nasdaq’s minimum bid price rule, but remains exposed to potential delisting under the Market Value of Listed Securities threshold. Management also discloses a material weakness in internal control over financial reporting.
Positive
- Revenue grew over 10%, with total revenue rising from $1.82 million to $2.55 million year over year for the six months ended June 30, 2026, including higher subscription revenue.
- The derivative liability tied to preferred stock was reduced from $1.32 million at December 31, 2025 to $0 at June 30, 2026 after amending Series 2 terms.
Negative
- The company reported a six‑month net loss of $4.51 million and negative operating cash flow of $4.46 million, continuing a pattern of recurring losses.
- Management states that recurring losses, limited cash of $3.81 million, and dependence on external financing raise substantial doubt about its ability to continue as a going concern.
- The company discloses a material weakness in internal control over financial reporting related to accounting for convertible preferred stock and embedded derivatives.
- Nasdaq listing remains at risk: estimated MVLS was about $5.7 million, only slightly above the $5 million threshold, and delisting could also trigger default on a $1.19 million exchange note.
Filing Explained
As of June 30, 3,911 Series 2 preferred shares remained convertible, creating potential future Class A issuance while the amendment removed variable-price and redemption mechanics.
Effective
The amendment eliminated the variable conversion-price feature, the deemed-liquidation provision, and the holder-initiated forced-redemption right upon an event of default. It set a fixed conversion price of
The disclosed state is outstanding preferred stock rather than a completed Class A issuance from the remaining shares. If conversion occurs, the additional Class A shares would increase the total share count and reduce existing holders’ percentage ownership absent offsetting changes.
Separately, the June 30 balance sheet reports a
Key Figures
Key Terms
temporary equity (mezzanine) financial
embedded conversion feature financial
Monte Carlo simulation model financial
material weakness in internal control over financial reporting regulatory
Market Value of Listed Securities (MVLS) market
going concern financial
Earnings Snapshot
FAQ
How did Cloudastructure (CSAI) perform financially for the six months ended June 30, 2026?
What is Cloudastructure’s cash position and accumulated deficit as of June 30, 2026?
Does Cloudastructure (CSAI) face going concern risks according to this 10-Q?
What accounting errors did Cloudastructure identify and how were they corrected?
How did Cloudastructure’s derivative liability change in 2026?
What Nasdaq listing risks does Cloudastructure (CSAI) disclose?
Did Cloudastructure’s revenue grow year over year in the first half of 2026?
AI-generated analysis. How Rhea-AI works. Not financial advice.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| (Address of principal executive offices) | (Zip Code) |
| ( |
||
| (Registrant’s telephone number, including area code) | ||
| NONE | ||
| (Former name or former address, if changed since last report.) |
Securities registered pursuant to Section 12(b) of the Act:
| ||||
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered | ||
Indicate by checkmark 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.
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).
Indicate by checkmark 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.
| Large Accelerated Filer ☐ | 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 a new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by checkmark whether the registrant is
a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding as of August 14, 2026 | |||
| Class A Common Stock | ||||
| Class B Common Stock |
CLOUDASTRUCTURE, INC.
EXPLANATORY NOTE
In connection with the preparation of the financial statements for the quarter ended March 31, 2026, the Company identified errors in the accounting treatment of the Company’s Series 1 and Series 2 Convertible Preferred Stock relating to (1) the failure to bifurcate and separately account for the embedded conversion features as derivative liabilities under ASC 815-15, and (2) the incorrect classification of the preferred stock host instruments within permanent stockholders’ equity rather than in temporary equity (mezzanine) as required by ASC 480-10-S99-3A (ASR 268). Management has concluded that these errors were individually and in the aggregate immaterial to any previously filed financial statement and, accordingly, has corrected the errors by revising the comparative prior period financial information presented in this report, in accordance with ASC 250-10-45-23.
The comparative financial information for the three months and six months ended June 30, 2025, and the balance sheet as of December 31, 2025, presented in this report have been revised to reflect the correction of these errors. See Note 2 to the condensed consolidated interim financial statements for additional details regarding the nature of the errors, the affected financial statement line items, and the quantitative effects of the revisions. See also Part I, Item 4 of this report for a discussion of the related material weakness in internal control over financial reporting.
| 2 |
TABLE OF CONTENTS
| Page No. | |||
| PART I. | FINANCIAL INFORMATION | 6 | |
| Item 1. | Financial Statements | 6 | |
| Condensed Consolidated Unaudited Balance Sheets | 6 | ||
| Condensed Consolidated Unaudited Statements of Operations | 7 | ||
| Condensed Consolidated Unaudited Statements of Comprehensive Loss | 8 | ||
| Condensed Consolidated Unaudited Statements of Temporary Equity and Stockholders’ Equity | 9 | ||
| Condensed Consolidated Unaudited Statements of Cash Flows | 11 | ||
| Notes to Interim Condensed Consolidated Unaudited Financial Statements | 12 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 46 | |
| Item 4. | Controls and Procedures | 47 | |
| PART II. | OTHER INFORMATION | 48 | |
| Item 1. | Legal Proceedings | 48 | |
| Item 1A. | Risk Factors | 48 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 49 | |
| Item 5. | Other Information | 50 | |
| Item 6. | Exhibits | 50 |
| 3 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that can involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “can,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future”, “goal,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements contained in this report may include, but are not limited to, statements about:
| · | the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements; | |
| · | our ability to access additional financing to support our operations | |
| · | the implementation of our business model and our strategic plans for our business, product, services and technology; | |
| · | our commercialization and marketing capabilities and strategy; | |
| · | our ability to establish or maintain collaborations or strategic relationships or obtain additional funding; | |
| · | our competitive position; | |
| · | the scope of protection that we able to establish and maintain for intellectual property rights covering our products, services and technology; | |
| · | developments and projections relating to our competitors and our industry; | |
| · | our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and | |
| · | the impact of new or existing laws and regulations on our business and strategy. |
We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, but these forward-looking statements are not guarantees of future performance or development. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this report, whether as a result of any new information, future events, or otherwise.
There are a number of risks, uncertainties, and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this report, including, among others, those factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K, as updated by information filed in our Forms 10-Q and Forms 8-K. A non-exhaustive summary of principal risk factors that make investing in our securities risky and may cause actual results to differ materially are set forth below:
| · | Although our Class A common stock has regained compliance with Nasdaq’s minimum bid price requirement, it remains at risk of being delisted from Nasdaq if we fail to maintain compliance with that requirement or with the MVLS requirement, as further discussed in Part II, Item 1A of this report; | |
| · |
Our ability to continue as a going concern will likely require substantial additional capital, which may not be available to us (particularly if our Class A common stock gets delisted from Nasdaq) or only available on terms that are expensive or highly-dilutive to our existing stockholders; | |
| · | Our technology continues to be developed, and it is unlikely that we will ever develop our technology to a point at which no further development is required; | |
| · | If our security measures are breached or unauthorized access to individually identifiable biometric or other personally identifiable information is otherwise obtained, our reputation may be harmed, and we may incur significant liabilities; |
| 4 |
| · | Our collection, processing, use and disclosure of individually identifiable biometric or other personally identifiable information is subject to evolving and expanding privacy and security regulations; | |
| · | Our success is highly dependent on our ability to attract and retain highly skilled executive officers and employees; | |
| · | Privacy and data security laws and regulations could require us to make changes to our business, impose additional costs on us and reduce the demand for our software solutions; | |
| · | Issues raised by the use of artificial intelligence (including machine learning) in our platforms may result in reputational harm or liability or affect our ability to operate profitably and sustainably; | |
| · | We operate in a highly competitive industry that is dominated by multiple very large, well-capitalized market leaders and is constantly evolving; | |
| · | Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products; | |
| · | We rely on other companies to provide certain hardware and software solutions for our products; | |
| · | We have identified a material weakness in our internal controls over financial reporting, as further discussed in Part I, Item 4 of this report; | |
| · | We incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives that are relatively new to us; | |
| · | Intellectual property rights do not necessarily address all potential threats to our competitive advantage; | |
| · | We have a limited operating history, which may make it difficult for you to evaluate our current business and predict our future success and viability; | |
| · | We have historically operated at a loss, which has resulted in an accumulated deficit; | |
| · | We anticipate sustaining operating losses for the foreseeable future; | |
| · | Raising additional capital may cause dilution to our existing stockholders; | |
| · | We have a substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenue; | |
| · | An active trading market for our Class A common stock may not be sustained, and the market price of shares of our Class A common stock may be volatile; | |
| · | Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our Class A common stock; | |
| · | Our internal computer systems, or those of any of our manufacturers, contractors, consultants, collaborators or potential future collaborators, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to our brand and material disruption of our operations; and | |
| · | Our operations are vulnerable to interruption by fire, severe weather conditions, power loss, telecommunications failure, terrorist activity, pandemics/epidemics and other events beyond our control, which could harm our business. |
| 5 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CLOUDASTRUCTURE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share numbers)
| June 30, 2026 | December 31, 2025 | |||||||
| (unaudited) | (as revised) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Fixed assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Derivative liability | ||||||||
| Preferred Dividends Payable | ||||||||
| Total current liabilities | ||||||||
| Note Payable, maturing July 30, 2027 | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| TEMPORARY EQUITY: | ||||||||
| Preferred Stock, $ | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Preferred Stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other Comprehensive Income | ( | ) | ( | ) | ||||
| TOTAL TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
* - The number of shares presented above is adjusted retrospectively to reflect the 1-for-30 reverse stock split effected on July 31, 2026. The number of authorized common and preferred shares presented above is adjusted retrospectively to reflect the change in the article of incorporation effected on July 31, 2026.
See accompanying notes to the unaudited financial statements.
| 6 |
CLOUDASTRUCTURE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share numbers)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2026 | June 30, 2025 | June 30, 2026 | June 30, 2025 | |||||||||||||
| (in thousands) | (unaudited) | (unaudited, as revised) | (unaudited) | (unaudited, as revised) | ||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit (loss) | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Operations | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expenses), net: | ||||||||||||||||
| Interest income | ||||||||||||||||
| State & sales taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Deemed dividend for original issue discount on preferred shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Available to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted (loss) per share of Class A and Class B common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Shares* | ||||||||||||||||
* The Company’s Weighted Average Shares for the three and six months ended June 30, 2026 and June 30, 2025 have been retroactively restated for the reverse stock split as described in the footnotes.
See accompanying notes to the unaudited financial statements.
| 7 |
CLOUDASTRUCTURE, INC.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
For the periods ended June 30, 2026
(in thousands, except share and per share numbers)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in foreign currency translation adjustment, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to the unaudited financial statements.
| 8 |
CLOUDASTRUCTURE, INC.
Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited)
For the six months ended June 30, 2026
(in thousands, except share and per share numbers)
| Temporary Equity Preferred Stock | Common
Stock Class A | Common Stock Class B | Permanent
Equity Preferred Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity (Deficit) | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares* | Amount | Shares* | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2025 (As Revised) | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock, net of embedded derivative bifurcation | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred Stock to Class A common stock | ( | ) | ( | ) | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Preferred stock deemed dividends and accretion | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Common stock activity | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Issuance costs | – | – | – | – | – | – | – | – | ( | ) | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | – | – | – | – | – | – | – | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance as of March 31, 2026 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock, net of embedded derivative bifurcation | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Derecognition of embedded derivative liability on amendment | – | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Extinguishment of Preferred Stock for promissory note | ( | ) | ( | ) | – | – | – | – | – | – | – | – | – | – | ( | ) | ||||||||||||||||||||||||||||||||
| Reclassification of Preferred Stock to permanent equity | ( | ) | ( | ) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Common stock activity | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Issuance costs | – | – | – | – | – | – | – | – | ( | ) | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | – | – | – | – | – | – | – | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2026 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
* The Company’s changes in stockholders’ equity for the three and six months ended June 30, 2025 has been retroactively restated for the reverse stock split as described in the footnotes.
| 9 |
Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited) (As Revised)
For the six months ended June 30, 2025
(in thousands, except share and per share numbers)
| Temporary Equity Preferred Stock | Common Stock Class A | Common Stock Class B | Permanent Equity Preferred Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders' Equity (Deficit) | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares* | Amount | Shares* | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock, net of embedded derivative bifurcation | – | – | – | – | – | ( | ) | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||
| Conversion of Preferred Stock to Class A common stock | ( | ) | ( | ) | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Preferred stock deemed dividends and accretion | – | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Issuance costs | – | – | – | – | – | – | – | – | ( | ) | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Common stock activity | – | – | – | ( | ) | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance as of March 31, 2025 (As Revised) | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock, net of embedded derivative bifurcation | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred Stock to Class A common stock | ( | ) | ( | ) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Preferred stock deemed dividends and accretion | – | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Issuance costs | – | – | – | – | – | – | – | – | ( | ) | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Common stock activity | – | – | – | ( | ) | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | ( | ) | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2025 (As Revised) | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
* The Company’s changes in stockholders’ equity for the three and six months ended June 30, 2025 has been retroactively restated for the reverse stock split as described in the footnotes.
See accompanying notes to the unaudited financial statements.
| 10 |
CLOUDASTRUCTURE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
| Six Months Ended June 30, | ||||||||
| (Unaudited) | ||||||||
| 2026 | 2025 | |||||||
| (As Revised) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | ( | ) | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease in accounts receivable | ( | ) | ( | ) | ||||
| (Increase) Decrease in other current assets | ( | ) | ( | ) | ||||
| (Increase) Decrease in inventory | ( | ) | ||||||
| Increase (Decrease) in accounts payable | ( | ) | ( | ) | ||||
| Increase (Decrease) in accrued expenses | ||||||||
| Increase (Decrease) in deferred revenue | ||||||||
| Increase (Decrease) in other current liabilities | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuances of Class A shares | ||||||||
| Proceeds from issuance of Preferred Shares | ||||||||
| Equity issuance costs | ( | ) | ( | ) | ||||
| Net Cash Provided by (Used in) Financing Activities | ( | ) | ||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ) | ||||||
| Net Change in Cash | ( | ) | ||||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | $ | $ | ||||||
| Supplementary disclosure of non-cash activities | ||||||||
| Equity issued for non-cash consideration | $ | $ | ||||||
| Derecognition and reclassification of derivative liability | $ | $ | ||||||
| Issuance of Series 2 Preferred Stock in settlement of accrued preferred dividends | $ | $ | ||||||
| Derivative liability reclassified to host instrument | $ | $ | ||||||
| Accrued preferred dividends | $ | $ | ||||||
| Series 2 Shares exchanged for unsecured promissory note | $ | $ | ||||||
See accompanying notes to the unaudited financial statements.
| 11 |
CLOUDASTRUCTURE, INC.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
Note 1 – Nature of Operations
Cloudastructure, Inc. (“Cloudastructure,” “we,” “us,” “our” or the “Company”) was formed on March 28, 2003, as a corporation organized under the laws of the State of Delaware and is headquartered in Palo Alto, California. We are a technology service provider that that focuses on intelligent devices and software for physical security applications. Since inception, we have relied primarily on financing activities, including an offering under Regulation A of the Securities Act of 1933, as amended (the “Securities Act”), and the sale of preferred stock, to fund our operations.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America (“U.S. GAAP”). The unaudited condensed consolidated interim financial statements included within this report have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2025 included in our Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements contain all the adjustments necessary to present fairly our financial condition as of June 30, 2026, and the results of operations for the six-month periods ended June 30, 2026 and 2025. The results of operations for the six-months and three-months ended June 30, 2026 are not necessarily indicative of the results to be expected for the full year.
Revision of Previously Issued Financial Statements
In connection with the preparation of the unaudited condensed consolidated interim financial statements for the three months ended March 31, 2026, the Company identified errors in the accounting for the Company's Series 1 Convertible Preferred Stock (the “Series 1 Shares”) and Series 2 Convertible Preferred Stock (the “Series 2 Shares” and, together with the Series 1 Shares, the “Preferred Shares”). The errors relate to two matters:
Error 1 -- Embedded Derivative Bifurcation
The Series 1 Shares and Series 2 Shares each contain an embedded conversion feature with a variable conversion price that, upon the occurrence of specified trigger events, adjusts to a percentage of the lowest volume-weighted average price over a specified lookback period, subject to a floor price. The Company previously accounted for each series of Preferred Shares as a single unit classified entirely within permanent stockholders' equity. Upon further analysis under ASC 815-15, the embedded conversion features fail the indexation criteria of ASC 815-40-15 due to the variable conversion price formula and accordingly are required to be bifurcated and accounted for as compound embedded derivative liabilities measured at fair value, with changes in fair value recognized in earnings each reporting period. No derivative liability was recognized in any previously filed financial statement from inception of each instrument (January 29, 2025 for the Series 1 Shares and March 25, 2025 for the Series 2 Shares) through December 31, 2025. The Series 1 Shares were fully converted during the second quarter of 2025 and accordingly carry a zero derivative liability balance as of December 31, 2025 and June 30, 2026.
| 12 |
Error 2 -- Mezzanine Classification
Separately, each series of Preferred Shares host instrument, after bifurcation of the embedded derivative, contains redemption features that are contingently exercisable upon the occurrence of events not solely within the control of the Company. Under ASC 480-10-S99-3A (ASR 268), the host instruments are required to be classified in temporary equity (mezzanine), presented between liabilities and stockholders' equity on the condensed consolidated balance sheet, rather than within permanent stockholders' equity as previously reported. As the Series 1 Shares were fully converted during the second quarter of 2025, the mezzanine balance for the Series 1 Shares is zero as of December 31, 2025 and June 30, 2026. As of December 31, 2025, there were Series 2 Shares outstanding, which were classified as temporary equity (mezzanine) as of that date. As of June 30, 2026, there were no Series 2 Shares outstanding classified as temporary equity (mezzanine) as of that date.
Materiality Assessment
Management performed a materiality assessment under SAB Topics 1.M and 1.N (SAB 99 and SAB 108) and concluded that neither error, individually or in the aggregate, was material to any previously filed interim or annual financial statement. Error 1 is an accumulating income statement error; because correcting the cumulative effect in the current period would disproportionately distort the six months and three months ended June 30, 2026, the Company has revised the prior period comparative financial information presented in this report in accordance with ASC 250-10-45-23. This revision does not represent a restatement of previously issued financial statements. Error 2 is a classification error with no effect on net income, earnings per share, total assets, total liabilities, or net assets; it has been corrected as an immaterial out-of-period reclassification. The prior period financial statements were not and are not considered materially misstated.
The accounting errors described above relate solely to the technical classification of the Preferred Shares on the balance sheet and, with respect to Error 1, to the measurement of the embedded derivative liability, which was a non-cash transaction. The revision to correct Error 2 (mezzanine classification) is purely a reclassification within total equity on the balance sheet, with no effect on net income, net loss per share, total assets, total liabilities, or total equity. The revision to correct Error 1 (derivative bifurcation) results in a reclassification of amounts between stockholders’ equity and derivative liabilities and changes the presentation of certain non-cash items within the statement of operations (specifically, the recognition of changes in fair value of derivative liabilities and the reclassification of preferred dividends as deemed dividends below net loss), but does not affect operating loss, cash flows from operations, or the Company’s ability to fund its business. As described in Note 5, on June 29, 2026, the Company amended and restated the terms of the Series 2 Shares to eliminate the contractual provisions that gave rise to both errors and believes the amended terms support permanent equity classification for the Series 2 Shares on a prospective basis. The Series 1 Shares were converted into our Class A common stock during the second quarter of 2025, and no Series 1 Shares were outstanding as of either December 31, 2025 or June 30, 2026.
Method of Correction
The comparative condensed consolidated balance sheet as of December 31, 2025, the comparative condensed consolidated statement of operations and comprehensive loss for the six months and three months ended June 30, 2025, the comparative condensed consolidated statement of stockholders' equity for the six months and three months ended June 30, 2025, and the comparative condensed consolidated statement of cash flows for the six months ended June 30, 2025 have been revised to reflect the correction of both errors. The derivative liability fair value at each measurement date was determined using a Monte Carlo simulation model with Level 3 inputs, including 90-day trailing realized equity volatility, estimated sell-rate as a fraction of average daily trading volume, and the contractual floor price. Additionally, the original issue discount on each series of Preferred Shares has been recognized as accretion to the host instrument carrying value in mezzanine, with a corresponding deemed dividend charge to accumulated deficit. The tables below present the effect of the revisions on the affected financial statement line items.
| 13 |
Effect of Revisions on the Condensed Consolidated Balance Sheet as of December 31, 2025
(in thousands)
| Schedule of condensed consolidated balance sheet | ||||||||||||
| Line Item | As Previously Reported | Adjustment | As Revised | |||||||||
| Derivative liability (current) | $ | $ | $ | |||||||||
| Total current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Temporary equity -- Series 2 | ||||||||||||
| Additional paid-in capital | ( | ) | ||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Total stockholders' equity | ( | ) | ||||||||||
| Total liabilities, temporary equity, and stockholders' equity | ||||||||||||
The Company’s Consolidated Balance Sheet as of December 31, 2025 contained no derivative liability, misclassified and misclassified the Series 2 Preferred Shares as Stockholders’ Equity instead of Temporary Equity. The derivative liability at December 31, 2025 was $1,321,000. Temporary equity of $4,187,000 was misclassified as Permanent equity at December 31, 2025. Accumulated deficit related to increase in fair value of the derivative liability of $549,000, reclassification of preferred dividends from income statement to balance sheet totaling $83,000, and deemed dividends totaling $64,000. dividends on preferred stock totaling $695,000. The change in Total stockholders’ equity related to the net of the changes to Additional paid-in capital and Accumulated deficit totaling $5,508,000.
Effect of Revisions on the Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2025
(in thousands, except per share data)
| Schedule of condensed consolidated statement of operations | ||||||||||||
| Line Item | As Previously Reported | Adjustment | As Revised | |||||||||
| Change in fair value of derivative liabilities | $ | $ | ( | ) | $ | ( | ) | |||||
| Preferred dividends | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Deemed dividends on Convertible Preferred Shares | ( | ) | ( | ) | ||||||||
| Net loss available to common stockholders | ( | ) | ( | ) | ( | ) | ||||||
| Net loss per share available to common stockholders -- basic and diluted | ( | ) | ( | ) | ( | ) | ||||||
The Company’s Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2025, contained no accounting for the change in fair value of derivative liabilities, which totaled $334,000 for the period. The financial statements misclassified preferred dividends as an income statement item totaling $162,000. Net loss failed to reflect the sum of these items, totaling $175,000. The financial statements did not properly reflect the deemed dividends related to the Series 2 Shares totaling $961,000. These changes impacted Net loss available to shareholders totaling $1,136,000, and Net loss available to shareholders on a per share basis totaling $1.32 per share.
Effect of Revisions on the Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2025
(in thousands, except per share data)
| Line Item | As Previously Reported | Adjustment | As Revised | |||||||||
| Change in fair value of derivative liabilities | $ | $ | $ | |||||||||
| Preferred dividends | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ||||||||
| Deemed dividends on Convertible Preferred Shares | ( | ) | ( | ) | ||||||||
| Net loss available to common stockholders | ( | ) | ( | ) | ( | ) | ||||||
| Net loss per share available to common stockholders -- basic and diluted | ( | ) | ( | ) | ( | ) | ||||||
The Company’s Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2025, contained no accounting for the change in fair value of derivative liabilities, which totaled $81,000 for the period. The financial statements misclassified preferred dividends as an income statement item totaling $285,000. Net loss failed to reflect the sum of these items, totaling $363,000. The financial statements did not properly reflect the deemed dividends related to the Series 2 Shares totaling $1,262,000. These changes impacted Net loss available to shareholders totaling $899,000, and Net loss available to shareholders on a per share basis totaling $0.65 per share.
| 14 |
Effect of Revisions on the Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2025
(in thousands)
| Schedule of condensed consolidated statement of cash flows | ||||||||||||
| Line Item | As Previously Reported | Adjustment | As Revised | |||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Change in fair value of derivative liabilities | ( | ) | ( | ) | ||||||||
| Increase in preferred dividends payable | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| Net cash provided by financing activities | ( | ) | ||||||||||
The revisions to the statement of cash flows reflect accounting for the change in fair value of derivative liabilities and the reclassification of Preferred Dividends from an income statement item to the balance sheet resulted in a decrease of Net loss totaling $363,000. The financial statements previously contained no accounting for the change in fair value of derivative liabilities, which totaling $81,000. The increase in preferred dividends payable Net cash used in operating activities decreased by $285,000 to reflect the reclassification of Preferred Dividends Payable from the Statement of Operations and Operating Cash Flows to the balance sheet and as an offset to net cash provided by financing activities, which decreased by $285,000 as a result, while net cash used in investing activities was unchanged.
Effect of Revisions on the Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited) (As Revised) as of March 31, 2025
| Schedule of condensed consolidated statements of temporary equity and stockholders’ equity deficit | ||||||||||||
| Balance as of March 31, 2025 | As Previously Reported | Adjustment | As Revised | |||||||||
| Temporary equity preferred stock (shares) | ||||||||||||
| Temporary equity preferred stock (amount) | $ | $ | $ | |||||||||
| Additional paid-in capital | ( | ) | ||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Total stockholders' equity (deficit) | ( | ) | ||||||||||
| Total | ( | ) | ||||||||||
The Company’s Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) as of March 31, 2025 misclassified the Series 2 Preferred Shares as Stockholders’ Equity instead of Temporary Equity. Temporary equity preferred stock (shares) increased by 8,285 shares from the original filing and Temporary equity preferred stock (amount) increased by $6,223,000. Additional paid-in capital decreased by $8,426,000, which is the sum of the amounts reclassified to Temporary equity preferred stock (amount) of $6,223,000, Derivative liability in the amount of $2,090,000, and offset by changes to Accumulated deficit in the amount of $114,000. Accumulated deficit decreased by $114,000 related to the change in fair value of $415,000 offset by the Deemed dividend for original issue discount on Preferred Stock totaling $301,000. The change in Total stockholders’ equity (deficit) was the net of the changes to Additional paid-in capital and Accumulated deficit. The change in Total equity was $2,090,000 which was the amount of the Derivative liability reclassified out of equity as of March 31, 2025.
Effect of Revisions on the Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited) (As Revised) as of June 30, 2025
| Balance as of June 30, 2025 | As Previously Reported | Adjustment | As Revised | |||||||||
| Temporary equity preferred stock (shares) | ||||||||||||
| Temporary equity preferred stock (amount) | $ | $ | $ | |||||||||
| Additional paid-in capital | ( | ) | ||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Total stockholders' equity (deficit) | ( | ) | ||||||||||
| Total | ( | ) | ||||||||||
The Company’s Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) as of June 30, 2025 misclassified the Series 2 Preferred Shares as Stockholders’ Equity instead of Temporary Equity. Temporary equity preferred stock (shares) increased by 6,687 shares from the original filing and Temporary equity preferred stock (amount) increased by $5,239,000. Additional paid-in capital decreased by $6,249,000, which is the sum of the amounts reclassified to Temporary equity preferred stock (amount) of $5,239,000, Derivative liability in the amount of $2,190,000, and offset by changes to Accumulated deficit in the amount of $1,185,000. Accumulated deficit increased by $1,185,000 related to the decline in fair value of $334,000 and by the Deemed dividend for original issue discount on Preferred Stock totaling $961,000. The change in Total stockholders’ equity (deficit) was the net of the changes to Additional paid-in capital and Accumulated deficit. The change in Total equity was $2,195,000 which was the amount of the Derivative liability reclassified out of equity as of June 30, 2025.
| 15 |
Effect of Revisions on the Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited) (As Revised) as of December 31, 2025
(in thousands)
| Balance as of December 31, 2025 | As Previously Reported | Adjustment | As Revised | |||||||||
| Temporary equity preferred stock (shares) | ||||||||||||
| Temporary equity preferred stock (amount) | $ | $ | $ | |||||||||
| Common stock, Class A (shares) | ( | ) | ||||||||||
| Common stock, Class A (amount) | $ | $ | $ | |||||||||
| Additional paid-in capital | ( | ) | ||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Total stockholders’ equity (deficit) | $ | ( | ) | |||||||||
The Company’s Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) as of December 31, 2025 misclassified the Series 2 Preferred Shares as Stockholders’ Equity instead of Temporary Equity. Temporary equity preferred stock (shares) increased by 5,166 shares from the original filing and Temporary equity preferred stock (amount) increased by $4,187,000. Additional paid-in capital decreased by $6,204,000, which is the sum of the amounts reclassified to Temporary equity preferred stock (amount) of $4,187,000, Derivative liability in the amount of $1,321,000, and offset by changes to Accumulated deficit in the amount of $695,000. Accumulated deficit decreased by $695,000 related to the increase in fair value of $549,000 and by the Deemed dividend for original issue discount on Preferred Stock totaling $1,888,000. The change in Total stockholders’ equity (deficit) of $5,508,000 was the net of the changes to Additional paid-in capital of $6,204,000 and Accumulated deficit of $695,000.
Effect of Revisions on the Condensed Consolidated Statements
Reclassification of Operating Expenses
In connection with the preparation of these condensed consolidated interim financial statements, the Company changed the presentation of operating expenses on the condensed consolidated statements of operations. In prior periods, the Company presented stock-based compensation, depreciation, and certain other non-cash charges as a single aggregated line item (“Non-cash expenses”) within operating expenses. Beginning with these financial statements, the Company has allocated these charges to the functional expense categories to which they relate (general and administrative, research and development, sales and marketing, and operations) and has added an operations category to better reflect the Company's current organizational structure. The Company also reclassified certain personnel and overhead costs among functional categories to align with how costs are managed and evaluated by the CODM. This change in presentation provides a more faithful depiction of the nature and function of the Company's operating expenses and is consistent with Regulation S-X, Rule 5-03. Prior period amounts have been reclassified to conform to the current period presentation. Total operating expenses for the six months and three months ended June 30, 2025, were not affected by these reclassifications.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the footnotes thereto. Actual results could differ from those estimates.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). Under Section 107 of the JOBS Act, emerging growth companies are permitted to use an extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards that have different effective dates for public and private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.
| 16 |
Risks and Uncertainties
We have a limited operating history. Our business and operations are sensitive to general business and economic conditions in the United States. A host of factors beyond our control could cause fluctuations in these conditions. Adverse conditions may include recession, downturn or otherwise, inflation, changes in regulations or restrictions on imports, tariffs, competition or changes in consumer taste. These adverse conditions could affect our financial condition and our results of operations.
Cash and Cash Equivalents
We consider short-term, highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash consists of funds held in our checking account. We maintain our cash with a major financial institution located in the United States, which we believe to be creditworthy. The Federal Deposit Insurance Corporation insures balances up to $250,000, but at times we may maintain balances in excess of the federally insured limits.
Receivables and Credit Policy
Trade receivables from customers are uncollateralized
customer obligations due under normal trade terms, Trade receivables are stated at the amount billed to the customer. Payments of trade
receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied
to the earliest unpaid invoice. We routinely assess our outstanding accounts receivable and recorded a reserve for estimated uncollectible
accounts of $
Inventory
Inventories are stated at the lower of weighted-average cost or net realizable value. Cost includes all expenditures incurred in bringing each product to its present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
The Company maintains a reserve for obsolescence for estimated excess, slow-moving, or unmarketable inventory based on periodic reviews of inventory levels, historical usage, and future sales forecasts. When the carrying value exceeds net realizable value, a write-down is recorded as a charge to cost of sales, establishing a new, lower cost basis that is not subsequently increased for future recoveries in value.
Property and Equipment
Property and equipment are recorded at cost if the expenditure exceeds $2,500. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the balance sheet accounts and the resultant gain or loss is reflected in income.
Depreciation is provided using the straight-line method, based on useful lives of the assets which range from two to five years depending on the asset type.
We review the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.
| 17 |
Sales Taxes
Various states impose a sales tax on our sales to non-exempt customers. We collect the sales tax from customers and remit the entire amount to each respective state. Our accounting policy is to exclude the tax collected and remitted to the states from revenue and cost of sales.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker (the “CODM”) in deciding how to allocate resources and assess performance. We have one reportable segment focused on cloud-based AI video surveillance and remote guarding security services. Our CODM, who is our Chief Executive Officer, manages operations on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. For additional information on our segment reporting, see Note 8, Segment Reporting.
Income Taxes
We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
We have incurred taxable losses since inception but are current in our tax filing obligations. We are not presently subject to any income tax audit in any taxing jurisdiction.
Reverse Stock Split
On October 24, 2024, we effected a
Revenue Recognition
We recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services, net of estimated returns, discounts, and allowances.
To determine revenue recognition for arrangements that an entity determines are within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we perform the following steps:
(i) identify the contract(s) with a customer,
(ii) identify the performance obligations in the contract,
(iii) determine the transaction price,
(iv) allocate the transaction price to the performance obligations in the contract, and
(v) recognize revenue when (or as) the entity satisfies a performance obligation.
| 18 |
At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
| · | Subscription Revenue: Recognized ratably over the contract term, as the customer simultaneously receives and consumes the benefits. | |
| · | Installation Labor: Recognized over time using an input method (measured by the ratio of costs incurred to date to total estimated costs), as this provides a faithful depiction of the transfer of services to the customer. | |
| · | Hardware: Recognized at a point in time, generally upon delivery, when title and risk of loss transfer to the customer. |
The Company generally acts as the principal in its arrangements and records revenue on a gross basis. Our contracts typically do not contain a significant financing component.
Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition from the Company’s contracts with customers. The Company primarily generates deferred revenue from annual service subscriptions.
These advance payments are recognized as revenue when control of the promised goods or services is transferred to the customer. Deferred revenue that is expected to be recognized as revenue within the next twelve months is classified as a current liability, while the remaining portion is classified as non-current.
Stock-Based Compensation
The Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees, upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation costs related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award which contains both a performance and a market condition, and where both conditions must be satisfied for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable the performance condition will be met. If the performance condition is ultimately not met, compensation costs related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied.
The Company will recognize forfeitures of such equity-based compensation as they occur.
Net Loss per Share
Net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options outstanding.
| 19 |
During the periods ended June 30, 2026, and December 31, 2025, the calculation of the effect of dilutive stock options, warrants, and conversion of preferred stock excluded all stock options, warrants, and conversion of preferred stock outstanding during the period due to their anti-dilutive effect.
Under the revised accounting for the Series 2
Shares, the
Consolidation and Foreign Currency Policies
The financial statements of the Company’s foreign subsidiary are translated into U.S. dollars for consolidation purposes. Assets and liabilities are translated using exchange rates in effect at the balance sheet date. Equity accounts are translated using historical exchange rates in effect at the dates of the related transactions. Income and expense accounts are translated using average exchange rates for the period, unless transaction-specific rates are more appropriate.
Translation adjustments resulting from the application of different exchange rates to assets and liabilities as compared to equity accounts are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. These translation adjustments are referred to as cumulative translation adjustment (“CTA”). CTA does not affect net income and will remain in accumulated other comprehensive income unless and until the Company substantially liquidates or disposes of its foreign subsidiary, at which time the related CTA balance would be reclassified into earnings in accordance with ASC 830.
Intercompany balances and transactions between
the Company and its foreign subsidiary have been eliminated in consolidation. Foreign currency transaction gains and losses related to
intercompany balances that are not of a long-term investment nature are recognized in earnings; however,
The Company is exposed to foreign currency exchange rate risk primarily related to its operations in India. The Company does not currently use derivative instruments to hedge foreign currency exposure. Fluctuations in exchange rates may affect the Company’s consolidated financial position, results of operations, and accumulated other comprehensive income.
Foreign Currency Translation
The accompanying condensed, consolidated financial statements are presented
in United States dollars (“$”). The functional currency of our Indian subsidiary is the Indian rupee (“INR”).
The company’s statement of operations and balance sheet include translations into $ from INR at INR
Our reporting currency is U.S. Dollars. We determine the functional currency of each of our international subsidiary and their operating divisions based on the primary currency in which they operate. In cases where the functional currency is not the U.S. dollar, we recognize a cumulative translation adjustment created by the different rates we apply to current period income or loss and the balance sheet. For each subsidiary, we apply the functional exchange rate to its income or loss and the year-end functional exchange rate to translate the balance sheet.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When fair value measurements are used, valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
U.S. GAAP has established a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability. Carrying values were assumed to approximate fair value for assets and liabilities since they are short term in nature.
| 20 |
Fair Value of Bifurcated Derivative Liabilities and Carrying Value of the Host Preferred Stock
With respect to its outstanding Preferred Shares, the Company is required to bifurcate the embedded conversion feature and account for it as a derivative liability measured at fair value at each reporting date, with changes recognized in earnings. The fair value of the bifurcated derivative is estimated using a Monte Carlo simulation model incorporating Level 3 inputs under the ASC 820 fair value hierarchy, including 90-day trailing realized equity volatility, estimated conversion sell-rate as a fraction of average daily trading volume, and the applicable contractual floor price. The Company evaluates the embedded conversion feature for bifurcation under ASC 815-15 at inception and upon any modification of the instrument's terms.
The fair value of the bifurcated derivative at issuance also directly determines the initial carrying value of the host preferred stock instrument, which is measured as cash proceeds received, reduced by the original issue discount, allocated issuance costs, and the derivative fair value. The resulting discount on the host is accreted to the Series 2 Preferred Liquidation Amount over the expected life of the instrument.
Because the derivative valuation and host carrying
value share critical assumptions, particularly expected term and equity volatility, changes in those assumptions affect both the fair
value of the derivative liability and the accretion pattern recognized on the host instrument and could have a material impact on the
Company's condensed consolidated financial statements. The Company classifies the derivative liability as a current liability based on
the holder's ability to exercise conversion rights at any time. The host preferred stock instrument is classified in temporary equity
(mezzanine) in accordance with ASC 480-10-S99-3A. The Amended Series 2 Certificate of Designations effective June 29, 2026 sunsets the
bifurcated derivative liability and corresponding mezzanine equity. As of June 30, 2026, the aggregate fair value of the derivative liabilities
was $
The Company measures certain financial instruments at fair value on a recurring basis in accordance with ASC 820, Fair Value Measurement. The following tables present information about the Company's financial liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values.
Fair Value Hierarchy
The following table presents the Company's financial liabilities measured at fair value on a recurring basis, categorized by level within the fair value hierarchy:
| Schedule of fair value hierarchy | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| As of June 30, 2026: | ||||||||||||||||
| Derivative liability | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2025: | ||||||||||||||||
| Derivative liability (As Revised) | $ | $ | $ | $ | ||||||||||||
Derivative Liability -- Level 3 Fair Value Rollforward
| Schedule of derivative liability roll forward | ||||||||
Six Months Ended June 30, 2026 | Twelve Months Ended December 31, 2025 | |||||||
| (As Revised) | ||||||||
| Beginning balance | $ | $ | ||||||
| Issuances (day-1 bifurcation of embedded derivative) | ||||||||
| Fair value losses | ( | ) | ( | ) | ||||
| Settlements (conversions to Class A common stock) | ( | ) | ( | ) | ||||
| Derecognition upon amendment of conversion terms | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
| 21 |
Issuances represent the Day-1 fair value of the compound embedded derivative bifurcated from the host preferred stock instrument at each issuance or PIK dividend date under ASC 815-15. Settlements on conversion represent the derecognition of the derivative liability allocated to converted preferred shares, with the offset recorded to additional paid-in capital. Net (gains) losses represent the change in fair value of the derivative liability recognized in the condensed consolidated statements of operations within "Change in fair value of derivative liabilities."
For the twelve months ended December
31, 2025 (as revised), issuances of $
For the six months ended June 30, 2026, issuances
of $
Significant Unobservable Inputs
The fair value of the compound embedded derivative
liability is estimated using an internally developed Monte Carlo simulation model. The significant unobservable inputs used in the Monte
Carlo simulation as of June 30, 2026 included 90-day trailing realized equity volatility of
| Schedule of significant unobservable inputs | |||
| Significant Unobservable Input | June 30, 2026 | December 31, 2025 | Valuation Impact |
| 90-day trailing realized equity volatility | Higher volatility increases fair value | ||
| Estimated sell-rate (% of average daily trading volume) | Higher sell-rate decreases fair value | ||
| Contractual floor price | $ |
$ |
Lower floor price increases fair value |
Changes in the significant unobservable inputs identified above could materially affect the estimated fair value of the derivative liability. The most significant driver of fair value is the assumed sell-rate, which determines the expected pace of conversion and the resulting dilutive impact on the common stockholders. An increase in the sell-rate assumption from 20% to 30% of ADV would increase the estimated fair value of the derivative liability, while a decrease to 10% of ADV would decrease the estimated fair value. The 90-day trailing realized equity volatility is derived from observable market data but is classified as Level 3 because it is a significant input to a model-based valuation that also relies on unobservable inputs. The contractual floor price of $6.00 per share represents 20% of the Nasdaq Minimum Price as of the most recent Tranche 3 issuance date, as defined in the Certificate of Designations.
Management performed an internal valuation using a Monte Carlo simulation with 100,000 paths per measurement date. The model simulates the daily stock price path, applies the contractual conversion mechanics (including the 88% of lowest 8-business-day VWAP conversion price formula), and estimates the fair value of the embedded conversion feature as the expected present value of the conversion discount. All underlying mathematical formulas, code scripts, and unobservable inputs are available for review by the Company's independent auditors.
| 22 |
Liquidity
Our future needs for liquidity will depend on a variety of factors, including, without limitation, our ability to generate cash flows from operations and the timing and availability of net proceeds from any future financing activities that we may conduct. Economic uncertainty, fluctuating interest rates, market volatility, slowdowns in transaction volume, delays in financing from banks and other lenders and other negative trends may, in the future, adversely impact our ability to timely access potential sources of liquidity. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected.
The accompanying unaudited condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below.
As of June 30, 2026, the Company had cash and cash equivalents of $3.81 million, an accumulated deficit of approximately $55.8 million, and net cash used in operating activities of $4.46 million for the six months ended June 30, 2026. The Company has incurred recurring operating losses and negative cash flows from operations since inception, and management expects these trends to continue for the foreseeable future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans to address these conditions include accessing financing pursuant to the Equity Line and/or the ATM Facility. However, the Company’s ability to access both the Equity Line and the ATM Facility is conditioned on, among other things, the Company’s Class A common stock continuing to be listed on the Nasdaq Capital Market and the effectiveness of applicable registration statements. As described in Item 1A (Risk Factors) of this Report, the Company’s continued Nasdaq listing remains subject to material uncertainty, including with respect to the MVLS requirement. The Company received a notification of non-compliance with Nasdaq’s minimum bid price requirement in February 2026 and effected a 1-for-30 reverse stock split on July 31, 2026. On August 14, 2026, the Company received confirmation from Nasdaq that it had regained compliance with Listing Rule 5550(a)(2) and that the matter was closed. Although the Company has regained compliance with the minimum bid price requirement, there can be no assurance that it will maintain compliance on a sustained basis. In addition, the Company’s estimated Market Value of Listed Securities (MVLS) as of June 30, 2026, was approximately $5.7 million, which provides a limited margin above the $5 million minimum MVLS requirement recently approved by the SEC (but currently stayed pending further SEC review). If the MVLS rule becomes operative, even a modest decline in the Company’s stock price could trigger immediate suspension and delisting proceedings without any cure period.
This creates a circular dependency: the Company’s primary plan to address its going concern conditions — accessing the Equity Line and ATM Facility — requires maintaining Nasdaq listing, but maintaining Nasdaq listing may itself require the additional capital that can only be obtained through those facilities. Because the conditions to accessing the Equity Line and ATM Facility include factors that are substantially outside of management’s control and subject to material uncertainty, management is unable to conclude that it is probable that these plans will be effectively implemented within the next twelve months. Accordingly, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern, and that such substantial doubt has not been alleviated by management’s plans.
In addition, a delisting of the Company’s Class A common stock from Nasdaq would constitute an event of default under the Exchange Note issued to Streeterville on June 30, 2026, in the outstanding principal amount of approximately $1.19 million (plus accrued interest), potentially accelerating the outstanding balance and increasing it by 10%.
Management continues to evaluate all available alternatives to address these uncertainties, including seeking alternative sources of financing that are not conditioned on Nasdaq listing, pursuing cost-reduction measures, and monitoring the SEC’s review of the MVLS rule. However, there can be no assurance that any alternative financing will be available on acceptable terms, if at all.
| 23 |
Note 3 – Revenue from Contracts with Customers
The following tables present the Company’s revenue disaggregated by the nature of the goods or services and the timing of revenue recognition for the three and six months ended June 30, 2026, and June 30, 2025, respectively:
| Schedule of disaggregated revenue | ||||||||
| Three Months Ended June 30, | ||||||||
| (in thousands, unaudited) | 2026 | 2025 | ||||||
| Service offerings | ||||||||
| Subscription services (Ratable) | $ | $ | ||||||
| Installation and other (Over time) | ||||||||
| Product offerings | ||||||||
| Hardware sales (Point in time) | ||||||||
| Total Revenue | $ | $ | ||||||
| Six Months Ended June 30, | ||||||||
| (in thousands, unaudited) | 2026 | 2025 | ||||||
| Service offerings | ||||||||
| Subscription services (Ratable) | $ | $ | ||||||
| Installation and other (Over time) | ||||||||
| Product offerings | ||||||||
| Hardware sales (Point in time) | ||||||||
| Total Revenue | $ | $ | ||||||
Note 4 – Basic and Diluted Loss Per Share
The weighted average number of shares used to calculate basic and diluted loss per share for the six-month and three-month periods ended June 30, 2026, and 2025 were as follows:
| Schedule of calculate basic and diluted loss per share | ||||||||||||||||
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Class A common stock | ||||||||||||||||
| Class B common stock | ||||||||||||||||
| Total | ||||||||||||||||
| 24 |
The following table presents the reconciliation of net loss attributable to common shareholders to net loss used in computing basic and diluted net loss per share of common stock:
| Schedule of reconciliation of net loss per share | Three Months Ended | Six Months Ended | ||||||||||||||
| (in thousands, except share and per share data) | June 30, 2026 | June 30, 2025 | June 30, 2026 | June 30, 2025 | ||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: Deemed dividend (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common shareholders - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average shares of common stock outstanding - basic and diluted | ||||||||||||||||
| Net loss per share attributable to common shareholders | ||||||||||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
(1) Represents deemed dividends on the Company’s convertible preferred shares, as described below.
As of June 30, 2026 and 2025, approximately
Note 5 – Share Capital
Regulation A Equity Financings
Between 2020 and 2023, the Company sold units
consisting of two shares of Class A common stock and one warrant to purchase one share of Class A common stock pursuant to Regulation
A under the Securities Act (“Regulation A”). The warrants were immediately exercisable and expired 18 months from the date
of issuance. Pursuant to these Regulation A offerings, the Company issued a total of approximately
All warrants issued pursuant to the Regulation A offerings expired on or before December 31, 2025. As of June 30, 2026, no warrants issued pursuant to the Regulation A offerings were still outstanding.
Preferred Stock Financings
As of July 31, 2026, the Company is
authorized to issue
| 25 |
Series 1 Convertible Preferred Stock
On November 25, 2024, the Company entered into
the Series 1 Equity Financing with Streeterville for the issuance and sale of $
Each share of Series 1 Preferred has a stated value of $1,111, subject to an automatic 10% increase upon the occurrence of (i) a Series 1 Trigger Event (defined below), (ii) if the Company fails to fully comply with any covenant, obligation, or agreement or fail to pay any amount when due and payable, and such failure is not cured within the applicable cure period, or (iii) upon the occurrence of any bankruptcy, insolvency, or similar event (each of (ii) and (iii) an “Event of Default”) (the “Series 1 Stated Value”).
Except as otherwise set forth in the Series 2 Certificate of Designations (defined below) or as required by applicable law, the Series 1 Preferred and the Series 2 Preferred rank equally (including with respect to dividends and distributions and upon any voluntary or involuntary liquidation, dissolution, or winding up of the Company (a “Liquidation Event”)) and are identical in all respects. Except to the extent that the holders of at least a majority of the outstanding Series 1 Preferred shares and the Series 2 Preferred shares, voting together as a single class, expressly consent to the creation of capital stock that is either senior or pari passu in rank with the Series 1 Preferred and the Series 2 Preferred, all other shares of capital stock of the Company will be junior in rank.
The Series 1 Preferred accrues a 10% per annum rate of return on the Series 1 Stated Value (the “Series 1 Preferred Return”) from the date of issuance. The Series 1 Preferred Return is payable on a quarterly basis, and is subject to quarterly compounding, either in cash or via the issuance of additional shares of Series 1 Preferred, at the Company’s discretion. Following the occurrence of an Event of Default, the preferred return will increase to 15% per annum until such Event of Default has been cured.
In the event of a Liquidation Event or Deemed Liquidation Event (defined below), the Series 1 Preferred will be paid an amount equal to (i) the Series 1 Stated Value at such time, plus (ii) any accrued and unpaid Series 1 Preferred Return (the “Series 1 Preferred Liquidation Amount”), prior to any payments being made to the holders of the Company’s common stock. Following payment of the Series 1 Preferred Liquidation Amount, the Series 1 Preferred will not participate in the distribution of any remaining assets of the Company.
A “Deemed Liquidation Event” will occur (i) if the Company merges or consolidates with another entity and its stockholders immediately prior to such transaction do not continue to hold a majority of the voting power immediately after such transaction, or (ii) if the Company sells, leases, transfers, exclusively licenses, or otherwise disposes of all or substantially all of its assets.
The Series 1 Preferred is convertible at any time into (i) the number of shares of Series 1 Preferred being converted multiplied by their then Series 1 Stated Value (the “Series 1 Conversion Amount”), divided by (ii) the Series 1 Conversion Price (defined below).
Prior to a Series 1 Trigger Event (defined below) or an Event of Default, the conversion price (“Series 1 Conversion Price”) is $9.00 per share of Class A common stock or, if lower, the price at which the Company issues Class A common stock or rights to receive Class A common stock (the “Series 1 Fixed Conversion Price”). Following a Series 1 Trigger Event or Event of Default, the Series 1 Conversion Price is the lesser of the (i) Series 1 Fixed Conversion Price, and (ii) greater of (x) 85% multiplied by the lowest daily volume weighted average price (VWAP) of the Class A common stock during the ten business day period prior to the measurement date, and (y) $1.00.
| 26 |
A “Series 1 Trigger Event” will occur (i) upon the Company’s receipt of a letter of noncompliance from Nasdaq, (ii) upon the Company’s average market capitalization during any 10 business day period falling below $75,000,000, and (iii) in any quarter beginning with the first calendar quarter of 2025 where (x) the Company’s stockholder equity is less than $2,500,000, (y) the Company incurs a net loss greater than $1,000,000, or (z) the Company’s net sales are less than $500,000.
Notwithstanding the foregoing, the Company will not give effect to any conversion of Series 1 Preferred to the extent that, following such conversion, the holder individually (without aggregating with its affiliates) would beneficially own in excess of 4.99% of the outstanding Class A common stock (the “Maximum Percentage”); provided, that the Maximum Percentage for a holder of Series 1 Preferred together with such holder’s affiliates will be 9.99%. The Maximum Percentage is enforceable, unconditional, and non-waivable and shall apply to all affiliates and assigns of each holder of the Series 1 Preferred.
The Company has the right at any time after the date that is six months from the earlier of (i) the effective date of the registration statement registering the shares of Class A common stock into which the Series 1 Preferred shares are convertible, and (ii) the date that such shares of Class A common stock are eligible for resale pursuant to Rule 144 under the Securities Act, to elect, in the Company’s sole discretion, to redeem all or any portion of the Series 1 Preferred then outstanding by paying an amount in cash equal to the Series 1 Preferred Liquidation Amount multiplied by 115%. In addition, the Company may, at its election, use at least 25% of any funds that the Company raises through an equity financing to redeem outstanding shares of Series 1 Preferred.
The Series 1 Preferred are not entitled to participate in any dividends, distributions, or payments to the holders of the Company’s common stock. However, the Series 1 Preferred shares are entitled to the Series 1 Preferred Return described above.
The Series 1 Preferred shall vote together with holders of the Class A common stock and Class B common stock on an as-converted basis, and not as a separate class, at any annual or special meeting of stockholders, and may act by written consent in the same manner as holders of the Class A common stock and Class B common stock. In addition, for so long as any shares of Series 1 Preferred are outstanding, the affirmative vote of a majority of the Series 1 Preferred then outstanding shall be required to (i) alter or change adversely the powers, preferences or rights given to the Series 1 Preferred or alter or amend the Series 1 Certificate of Designations, or (ii) enter into any agreement with respect to any of the foregoing.
Notwithstanding the foregoing, in no event shall a holder of Series 1 Preferred (together with such holder’s affiliates, and any “persons” acting as a “group” (as such terms are defined under Sections 13(d) and 14(d) of the Exchange Act and the rules and regulations promulgated thereunder) together with such holder or such holder’s affiliates (such persons, “Attribution Parties”)) be entitled to vote, on an as-converted basis and in aggregate with respect to any other shares of the Class A common stock, Class B common stock, Series 2 Preferred or other preferred stock beneficially owned by such holder of Series 1 Preferred or any affiliates or Attribution Parties of such holder, more than 4.99% of the Company’s outstanding voting shares as of the applicable record date, as adjusted for any stock splits, reverse stock splits, stock dividends, reclassifications, reorganization, recapitalizations or other similar transaction.
Series 2 Convertible Preferred Stock
On March 21, 2025, the Company entered into
Series 2 Equity Financing with Streeterville. At the initial closing of the Series 2 Equity Financing on March 25, 2025, the Company
sold $
| 27 |
Effective June 29, 2026, with the consent of Streeterville,
the Company filed an Amended and Restated Certificate of Designations of Preferences and Rights of Series 2 Convertible Preferred Stock
(as subsequently amended, the “Amended Series 2 Certificate of Designations”) with the State of Delaware that amended and
restated the terms of the Series 2 Shares in their entirety. The Amended Series 2 Certificate of Designations (i) eliminated the variable
conversion price feature that gave rise to the compound embedded derivative liability, (ii) eliminated the deemed liquidation event provision
(such that no merger, consolidation, or sale of substantially all assets will trigger the right of a holder to receive the liquidation
amount), (iii) eliminated the holder-initiated forced redemption right upon an event of default, and (iv) reduced the fixed conversion
price to $
Each Series 2 Share has a stated value of $
Except to the extent that the holders of at least a majority of the outstanding Series 2 Shares expressly consent to the creation of capital stock that is either senior or pari passu in rank with the Series 2 Shares, all other shares of capital stock of the Company will be junior in rank.
The Series 2 Shares accrue a 9.5% per annum rate of return on the Series 2 Stated Value (the “Series 2 Preferred Return”) from the date of issuance. The Series 2 Preferred Return is payable on a quarterly basis, and is subject to quarterly compounding, either in cash or via the issuance of additional Series 2 Shares, at the Company’s discretion. Following an Event of Default, the Series 2 Preferred Return increases to 15% per annum until such Event of Default has been cured.
The Series 2 Shares are convertible into shares
of Class A common stock at any time into (i) the number of Series 2 Shares being converted multiplied by their then Series 2 Stated Value
(the “Series 2 Conversion Amount”), divided by (ii) $12.00 (which has been adjusted to give effect to the 1-for-30 reverse
stock split effective July 31, 2026, as discussed in Note 7 below). If the Company issues any Class A common stock or any warrant, option,
or other right to receive Class A common stock at a price per share lower than $12.00 per share, the conversion price for the Series 2
Shares will automatically be reduced to such lower price. The conversion price for the Series 2 Shares was amended in the Amended Series
2 Certificate of Designations effective June 29, 2026. Prior to such date, the Series 2 Shares were convertible into shares of Class A
common stock at a variable conversion rate. During the three months ended March 31, 2026, the
Notwithstanding the foregoing, the Company will not give effect to any conversion of Series 2 Shares to the extent that, following such conversion, the holder individually (without aggregating with its affiliates) would beneficially own in excess of 4.99% of the outstanding Class A common stock (the Maximum Percentage); provided, that the Maximum Percentage for a holder of Series 2 Shares together with such holder’s affiliates will be 9.99%. The Maximum Percentage is enforceable, unconditional, and non-waivable and shall apply to all affiliates and assigns of each holder of the Series 2 Shares.
| 28 |
The Company has the right at any time to elect, in the Company’s sole discretion, to redeem all or any portion of the Series 2 Shares then outstanding by paying an amount in cash equal to the Series 2 Preferred Liquidation Amount (as defined in the Amended Series 2 Certificate of Designations) multiplied by 115%. In addition, the Company may, at its election, use at least 25% of any funds that it raises through an equity financing to redeem outstanding Series 2 Shares.
The Series 2 Shares are not entitled to participate in any dividends, distributions, or payments to the holders of the Company’s Class A common stock. However, the Series 2 Shares are entitled to the Series 2 Preferred Return described above.
The Series 2 Shares shall vote together with holders of Class A common stock and Class B common stock on an as-converted basis, and not as a separate class, at any annual or special meeting of stockholders, and may act by written consent in the same manner as holders of Class A common stock and Class B common stock. In addition, for so long as any Series 2 Shares are outstanding, the affirmative vote of a majority of the Series 2 Shares then outstanding shall be required to (i) alter or change adversely the powers, preferences or rights given to the Series 2 Shares or alter or amend the Amended Series 2 Certificate of Designations, or (ii) enter into any agreement with respect to any of the foregoing.
Notwithstanding the foregoing, in no event shall a holder of Series 2 Shares (together with such holder’s affiliates, and any “persons” acting as a “group” (as such terms are defined under Sections 13(d) and 14(d) of the Exchange Act and the rules and regulations promulgated thereunder) together with Attribution Parties) be entitled to vote, on an as-converted basis and in aggregate with respect to any other shares of our Class A common stock, Class B common stock or other preferred stock beneficially owned by such holder of Series 2 Shares or any affiliates or Attribution Parties of such holder, more than 4.99% of the outstanding voting shares as of the applicable record date, as adjusted for any stock splits, reverse stock splits, stock dividends, reclassifications, reorganization, recapitalizations or other similar transaction.
Pursuant to the Amended Series 2 Certificate of Designations, for so long as any Series 2 Shares remain outstanding, the Company has agreed to comply with a number of covenants restricting its ability to take certain actions or engage in certain activities. In particular, at any time that any Series 2 Shares are outstanding, the Company will not issue any preferred stock or other securities (except for certain limited issuances), will not enter into certain fundamental transactions (including, without limitation, mergers, business combinations or similar transactions), and will not incur any debt (other than trade payables incurred in the ordinary course of our business) without, in each case, the prior written consent of the holders of a majority of the Series 2 Shares then issued and outstanding.
Under the Series 2 Equity Financing, Streeterville initially had the right, but not the obligation, to reinvest up to an additional $4.0 million in one or more tranches, which was reduced to $3.0 million following the April 2025 issuance, and further reduced to $0 following the December 2025 issuance, as well as participation rights in up to 30% of future debt or equity financings, subject to specified time limitations. These arrangements superseded similar reinvestment and participation rights under the Series 1 Equity Financing and further enhanced the Company’s liquidity and financial flexibility.
For the periods ended June 30, 2026 and December
31, 2025, the Company elected to pay the return on the Series 2 Shares by issuing additional Series 2 Shares. On January 5, 2026 and April
3, 2026, we issued Streeterville an additional
On June 30, 2026, the Company entered into an
Exchange Agreement with Streeterville pursuant to which Streeterville exchanged
| 29 |
Mezzanine (Temporary) Equity Rollforward
The following table presents the activity in the carrying value of the Series 1 Shares and Series 2 Shares classified in temporary equity for the six months ended June 30, 2026 and twelve months ended December 31, 2025:
| Schedule of mezzanine equity roll forward | ||||||||
| Six Months Ended June 30, 2026 |
Twelve Months Ended December 31, 2025 | |||||||
| Beginning balance | $ | $ | ||||||
| Issuances at proceeds/accrued value | ||||||||
| Embedded derivative bifurcation at issuance | ( |
) | ( |
) | ||||
| Preferred return accrual (deemed dividend) | ||||||||
| OID accretion (deemed dividend) | ||||||||
| Conversions to Class A common stock | ( |
) | ( |
) | ||||
| Derecognition of Derivative Liability | ||||||||
| Conversion to Note Payable | ( |
) | ||||||
| Reclassification to permanent equity | ( |
) | ||||||
| Ending balance | $ | $ | ||||||
| Shares outstanding at period end | ||||||||
| Carrying value per share | $ | $ | ||||||
Accretion of the original issue discount and the 9.5% preferred return are recognized as increases to the temporary equity carrying value with corresponding charges to additional paid-in capital and accumulated deficit as deemed dividends. Upon conversion of Series 2 Shares to Class A common stock, the host instrument carrying value at the conversion date is reclassified from temporary equity to additional paid-in capital, and the related bifurcated derivative liability is derecognized at fair value with the offset recorded to additional paid-in capital.
Equity Line Financing
On November 25, 2024, we entered into the Equity
Line with Atlas, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Atlas will purchase
up to an aggregate of $50.0 million of our Class A common stock over the 24-month term of the Equity Line. In consideration of Atlas’s
commitment to purchase shares pursuant to the Equity Line, we issued
Equity Distribution Agreement
On February 2, 2026, we entered into the ATM Facility
with Maxim to create an at-the-market equity program. Under the ATM Facility, we may offer and sell shares of our Class A common stock
from time to time having an aggregate offering amount of up to $
| 30 |
Any sales of our Class A common stock under the ATM Facility may be made through any method permitted by law to be “at-the-market equity offerings” as defined in applicable SEC rules, including sales directly on The Nasdaq Capital Market, at market prices or as otherwise agreed with Maxim. We have no obligation to sell any shares pursuant to the ATM Facility, and no assurance can be given that we will sell any shares pursuant to the ATM Facility, or if we do, as to the price or number of shares to be sold or the dates on which any such sales will take place. The ATM Facility will terminate on the earliest of (a) the sale, pursuant to the ATM Facility, of shares having an aggregate offering price of $9.0 million, (b) February 2, 2027, and (c) earlier termination in certain situations, as set forth in the ATM Facility.
Stock-Based Compensation
The Company maintains the Cloudastructure, Inc.
Amended and Restated 2024 Equity Incentive Plan (as subsequently amended, the “Incentive Plan”), which was adopted by the
board of directors on June 27, 2025, and approved by the Company’s stockholders in September 2025. The Incentive Plan is an amendment
and restatement of the Company’s previous 2024 Stock Option Plan. Under the Incentive Plan, the Company may grant incentive stock
options, non-qualified stock options, restricted stock awards, restricted stock units, and other stock-based awards to employees, directors,
and consultants. As of June 30, 2026, there were the equivalent of
Stock options granted under the Incentive Plan are generally exercisable into shares of the Company’s Class B common stock or Class A common stock. Since the Company’s Nasdaq listing in January 2025, options have been granted at an exercise price equal to the closing price of the Company’s Class A common stock on the date of grant. Since January 1, 2025, all stock option grants have been for Class A common stock. Options generally vest over four years, with an initial one-year cliff, and expire ten years from the date of grant.
The fair value of stock option awards is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of subjective assumptions, including (i) the estimated fair value of the underlying stock on the measurement date, (ii) the expected term of the option, (iii) the expected volatility of the Company’s stock price, and (iv) the risk-free interest rate. Due to the Company’s limited trading history as a publicly listed company, expected volatility is estimated based on the historical volatility of the stock prices of comparable publicly traded companies over a period commensurate with the expected term. The expected term is estimated using the simplified method permitted under SEC Staff Accounting Bulletin No. 107, as the Company does not have sufficient historical exercise data to provide a reasonable basis for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the expected term.
The following table summarizes the assumptions used to estimate the fair value of options granted during the six-month periods ended June 30, 2026 and 2025:
| Schedule of assumptions used for option valuation | ||||||||
| June 30, 2026 | June 30, 2025 | |||||||
| Expected term (years) | ||||||||
| Expected volatility | ||||||||
| Risk-free rate | ||||||||
| Expected dividend yield | ||||||||
| Weighted-average grant date fair value per option | $ | $ | ||||||
All equity grants are issued at current stock
price on the day of grant, using the average of the day’s high and low stock price. For the six months ended June 30, 2026,
this range was between $18.00 - $20.10 per share. For the six months ended June 30, 2025, the stock price and exercise price was $
| Schedule of option activity | ||||||||||||
Number of Options | Exercise Price Range | Weighted- Average Exercise Price | ||||||||||
| Options outstanding at December 31, 2025 | $ | |||||||||||
| Granted | ||||||||||||
| Canceled | ||||||||||||
| Exercised | ||||||||||||
| Options outstanding at March 31, 2026 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Canceled | ||||||||||||
| Exercised | ||||||||||||
| Options outstanding at June 30, 2026 | $ | $ | ||||||||||
| 31 |
Approval of Option Repricing
On May 21, 2026, our Board of Directors adopted,
subject to stockholder approval, an amendment to the Incentive Plan to permit a one-time repricing of the Company’s stock options
outstanding as of May 21, 2026 (the “Subject Options”), and to authorize the Board (or a committee thereof) to implement such
option repricing, subject to certain parameters and safeguards. As of May 21, 2026, the Subject Options consisted of approximately
Outstanding Warrants
There were
Note 6 – Related Party Transactions
The following transactions occurred between related parties; therefore, there can be no guarantee that the terms, conditions, interest rates, or prices were transacted at an arm’s-length rate.
Data Center Lease
On January 1, 2024, the Company entered into a
month-to-month lease agreement (the “Lease”) with Hydro Hash (HH), a related party, for additional data center space. The
Lease includes space, power, and high-speed internet access and qualifies as a short-term lease under ASC 842. Accordingly, lease costs
are recognized as lease expense on a straight-line basis over the lease term, and no right-of-use asset or lease liability has been recorded.
Under the Lease, the Company pays fixed
Consulting Agreement
On February 16, 2026, the Company entered into
a month-to-month consulting agreement (the “Agreement”) with Melissa Hargis, a related party, for software engineering services.
The Agreement provides for Ms. Hargis to provide software engineering services to the Company on a monthly basis at a rate of $8,000
per month. The Agreement concluded as of May 15, 2026. During the three-month period ended June 30, 2026, the Company incurred $
Note 7 – Reverse Stock Splits
Effective October 24, 2024, following approval by our board of directors and stockholders, we effected a 1-for-6 reverse stock split of all classes of the Company’s issued and outstanding capital stock through the filing of an amended and restated certificate of incorporation with the State of Delaware.
Effective July 31, 2026, following approval by
our board of directors and stockholders, we effected a
All share and per share information in this report are presented after giving effect to both of these reverse stock splits retrospectively for all periods presented.
Note 8 – Segment Reporting
We operate as one operating segment focused on cloud-based AI video surveillance and remote guarding security services. Operating segments are defined as components of an enterprise for which separate financial information is available for evaluation by the CODM in deciding how to allocate resources and assess performance. Our CODM evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. There is no expense or asset information supplemental to the information disclosed in these financial statements that is regularly provided to the CODM. The allocation of resources and assessment of performance of the operating segment is based on net income as shown in our statement of operations. The CODM considers net income in the annual forecasting process and reviews actual results when making decisions about allocating resources. Since we operate as one operating segment, financial segment information, including profit or loss and asset information, can be found in these financial statements.
| Schedule of segment information | ||||||||
| Surveillance Segment | ||||||||
| Three months ended June 30, | ||||||||
| (Unaudited) | ||||||||
| 2026 | 2025 | |||||||
| Revenue | $ | $ | ||||||
| Less: | ||||||||
| Cost of Goods Sold | ||||||||
| General & Administrative | ||||||||
| Research & Development | ||||||||
| Sales & Marketing | ||||||||
| Operations | ||||||||
| Loss from operations | ( |
) | ( |
) | ||||
| Other (taxes, interest, etc.) | ( |
) | ||||||
| Segment net income/(loss) | ( |
) | ( |
) | ||||
| Consolidated net income/(loss) | $ | ( |
) | $ | ( |
) | ||
| 34 |
Note 9 – Subsequent Events
On July 15, 2026, at the Company’s annual meeting of stockholders, the Company’s stockholders approved an amendment to the Incentive Plan to permit a one-time repricing of the Company’s stock options outstanding as of May 21, 2026 (the “Subject Options”). As of May 21, 2026, the Subject Options consisted of approximately 514,992 options with exercise prices ranging from $0.72 to $202.50 per share (on a post-split basis). The amendment authorizes the Board (or a committee thereof) to reduce the exercise price of the Subject Options to no less than the fair market value of the Company’s Class A common stock on the date any repricing is effected. The amendment does not increase the number of shares available for issuance under the Incentive Plan. Under ASC 718, if and when the Board implements the repricing, the Company will be required to recognize any incremental compensation expense resulting from the modification, measured as of the repricing date, over the remaining requisite service period. As of the date of this report, the Board has not determined whether or when to implement the repricing, and accordingly no incremental compensation expense has been recognized.
Effective July 31, 2026, following approval by our board of directors and stockholders, we effected a 1-for-30 reverse stock split of all of the Company’s issued and outstanding Class A and Class B common stock through the filing of an amendment to our certificate of incorporation with the State of Delaware. All share and per share information in this report is presented after giving effect to this reverse stock split retrospectively for all periods presented.
On August 6, 2026, the Company entered into a second Exchange Agreement with Streeterville pursuant to which Streeterville exercised its monthly redemption right under the Exchange Note described in Note 5 above. In accordance with the terms of the Exchange Note, Streeterville partitioned $108,332.50 from the outstanding balance of the Exchange Note and exchanged the resulting Partitioned Note for 22,297 shares of the Company’s Class A common stock at an effective conversion price of approximately $4.86 per share. The exchange was effected as a Section 3(a)(9) exchange under the Securities Act without any additional consideration paid by Streeterville. Following the exchange, the outstanding principal balance of the Exchange Note was reduced to approximately $1,191,538, plus accrued interest. Streeterville retains the right to redeem up to $108,332.50 (plus accrued interest) per calendar month for the remaining term of the Exchange Note, which matures on July 30, 2027.
On August 14, 2026, the Company received a letter from The Nasdaq Stock Market LLC confirming that the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2). Nasdaq determined that for the 10 consecutive business days from July 31 through August 13, 2026, the closing bid price for the Company’s Class A common stock was at $1.00 per share or greater, and accordingly the minimum bid price matter is now closed.
Management’s Evaluation
Management has evaluated subsequent events to determine if events or transactions occurring after the balance sheet date through the date the financial statements were issued require potential adjustment to or disclosure in the financial statements and has concluded that all such events or transactions that would require recognition or disclosure have been recognized or disclosed.
| 35 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
Cloudastructure, Inc. (“Cloudastructure,” “we,” “our,” or “the Company”) is an award-winning innovator in cloud-native, AI-powered security solutions, delivering comprehensive, real-time situational awareness to enterprises to protect people, property, and brand reputation from threats such as theft, vandalism, false liability and violence. Headquartered in Palo Alto, California, Cloudastructure delivers a full-stack solution—cutting-edge cloud video surveillance, proprietary AI/ML analytics, and a seamless remote guarding platform with accompanying services—that transforms security from a reactive toolkit into a proactive system capable of stopping crime in real time.
Our mission is to empower businesses to see and respond to events as they happen, turning video data into actionable intelligence and deterrence into measurable results. By leveraging a cloud-based architecture, we provide organizations with unprecedented scalability, flexibility, and operational insight, without the limitations of traditional, on-premises systems. Every camera and alert is woven into a unified digital fabric, giving operators the power to act proactively, mitigate risks, and safeguard communities.
Cloudastructure’s solutions encompass a suite of integrated offerings:
Cloud Video Surveillance – AI-enhanced video capture and analytics that automate event detection, anomaly recognition, and real-time alerts to reduce loss, liability, and security blind spots.
Seamless Remote Guarding Software – Cloud-native orchestration that connects cameras, AI, and operators into one platform, enabling incident triage, standardized response playbooks, and auditable records that strengthen risk management and compliance.
Remote Guarding – 24/7 live response by trained security personnel, tightly integrated with AI monitoring for rapid intervention, risk mitigation, and documented response to support insurance and legal defense.
Operational Intelligence – Centralized dashboards, reporting, and alerts for property managers and enterprise security teams, driving informed decision-making, streamlined workflows, and better alignment between security operations and overall risk management strategy.
Our platform primarily serves multifamily residential and broader property management, with a growing presence in commercial real estate, construction, critical infrastructure, transportation and logistics. We focus on enterprises that value safety, liability reduction, and operational efficiency, helping them realize clear returns through fewer incidents, stronger compliance, and better protection of their tenants, assets, and brand.
Cloudastructure’s competitive advantage lies in its ability to centralize security operations, leveraging AI to monitor activity at scale while seamlessly connecting to a global network of trained security professionals. Unlike traditional hardware-bound systems, our platform eliminates on-site constraints, reduces total cost of ownership, and allows organizations to protect what matters most with precision and confidence.
Since our founding, Cloudastructure has maintained an entrepreneurial commitment to innovation, reliability, and customer-centric design, continually expanding its reach while reinforcing its reputation as a trusted partner for modern security challenges. By combining state-of-the-art technology, cloud-first infrastructure, and proactive security services, we redefine what it means to protect people and property in an increasingly complex world.
| 36 |
Cloudastructure was formed under the laws of the State of Delaware on March 28, 2003. We operated as a small Silicon Valley startup until early 2021 when we raised over $35 million in funding under Regulation A of the Securities Act. With these funds, we quickly built a sales, marketing, and support structure and achieved a degree of early success in the property management space. We went public on the Nasdaq under ticker symbol CSAI in January 2025. As of December 31, 2025, we have contracts with six of the top ten property management companies on the National Multifamily Housing Council’s (“NMHC’s”) 2025 NMHC 50 list—Greystar Real Estate Partners, Asset Living, Avenue5 Residential, LLC, Cushman & Wakefield, FPI Management, Inc., and Bozzuto. Our cloud-based solutions allow our customers to provide real-time safety and security across their properties, while efficiently managing operations across all locations. Beyond multifamily, we have seen growth in adjacent verticals, including construction and critical infrastructure, supported by strategic engagements with a leading national builder and a trucking and logistics partner. We are currently focused on expanding within our existing top-tier customer locations and acquiring additional customers in the property management (“proptech”) space, and we anticipate continuing to enter into additional new markets in 2026.
Our intelligent AI solution works by sorting motion-based footage and subsequently indexing the people, vehicles, and objects (license plates, animals, backpacks, guns, etc.) within that footage. Eliminating static footage enables rapid search, so that property managers can rapidly search for challenges brought to their attention by tenants. Simultaneously, our AI analytics create customizable alerts to anomalous behavior as it is occurring, such as unauthorized access, loitering, and vandalism, and forward that behavior in seconds to live remote guards for further review. Our Remote Guarding software enables guards to review the footage that created the alert with live view, and, should they determine unwanted activity is occurring, they can “voice down” the perpetrator on a speaker, as well as contact security or law enforcement, thereby providing a proactive response to crime. Based on internal data comparing the total number of actual threatening activity alerts received by our Remote Guards, against all potentially suspicious and threatening activity alerts received by our Remote Guards, our Remote Guarding services deterred an average of over 98% of all threatening activity for our customers in 2025. We believe AI security delivers multiple benefits for many property owners, including, without limitation:
| · | Deter crime and improve overall safety by leveraging AI-driven monitoring and rapid-response remote guarding; | |
| · | Improve occupancy and rental rates by creating a safer, more attractive environment for residents and tenants; and | |
| · | Reduce losses, lower onsite guard costs, and decrease insurance rates by streamlining security operations and mitigating incidents before they escalate. |
We believe that our full stack solution is more affordable, offers greater accountability, and is easier to use than the various solutions that our competitors offer. Our Remote Guarding service bridges the line between AI and human intelligence. AI has the ability to monitor all cameras at the same time and all of the time, a task from which humans would fatigue. By filtering out non-essential footage and only sending alerts for unusual or suspicious activity, our guards no longer need to watch every camera constantly. This focused monitoring allows a single Remote Guard to effectively oversee up to 50 cameras—roughly eight times more than the typical six cameras a guard can manage with traditional static surveillance—while maintaining the same level of vigilance and response accuracy. With real-time human intervention, our Remote Guarding service can turn video surveillance from a forensic tool, used after a crime has been committed, into a real time crime prevention tool.
Components of Results of Operations
Net Revenues
Our net revenues primarily consist of revenues generated from subscriptions to our core business services (cloud video surveillance and remote guarding), revenues generated from hardware sales, and revenue generated from installation services.
We bill cloud video surveillance and remote guarding according to the number of camera views. Hardware mainly includes cloud video recorders, surveillance cameras, and horn speakers kept in inventory. Installation services include the labor needed to set in place said hardware and software.
| 37 |
We recognize revenue when a customer obtains control of promised goods or services. Typically, our customers pay up front annually for our services and sign subscription and remote guarding agreements governing the terms of service. In those instances, revenue is recognized ratably over the period that commences on the subscription start date and ending on the date the subscription term expires. Some of our customers require monthly billing arrangements, in which case revenue is recognized on a monthly basis. Revenue generated from sales of hardware is generally recognized at time of delivery. Revenue generated from installation services is generally recognized at the completion of the professional services.
Cost of Goods Sold
Cost of goods sold primarily consists of hosting costs, the costs of equipment sold, installation costs and the costs of the operations department.
Operating Expenses
Operating expenses consist of general and administrative expenses, which are primarily salaries, professional fees, consulting costs and expenses related to the administrative functions of the Company, research and development expenses, which consist primarily of product development costs and salaries, and sales and marketing expenses, which represent public relations, advertising and direct marketing costs, as well as the associated personnel costs.
Results of Operations
Comparison of the three months ended June 30, 2026 to the three months ended June 30, 2025
Net Revenues
The majority of our net revenues for the three months ended June 30, 2026 were comprised of subscription revenue generated from our core business services (cloud video surveillance and remote guarding) and hardware sales.
The following table summarizes our revenue by service line:
Three Months Ended June 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| Cloud Video Surveillance | $ | 411 | $ | 151 | ||||
| Remote Guarding | 353 | 138 | ||||||
| Hardware | 233 | 451 | ||||||
| Other (installation, door subscriptions, etc.) | 236 | 347 | ||||||
| $ | 1,233 | $ | 1,086 | |||||
Total revenue increased by $147,000, or 14%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. The Company increased the number of subscribing properties by 140% during the three months ended June 30, 2026 when compared to the same period in 2025. During the second quarter of 2026, cloud video subscriptions increased by $260,000, or 172%, Remote Guarding increased by $215,000, or 156%, hardware sales decreased by $218,000, or 48%, and installation sales and other sales decreased by $111,000, or 32%, over the same period in 2025.
| 38 |
Cost of Goods Sold
The following table summarizes our cost of goods sold:
| Three Months Ended June 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| Hosting and Data Center Bandwidth | $ | 132 | $ | 69 | ||||
| Remote Guarding | 90 | 46 | ||||||
| Hardware | 80 | 257 | ||||||
| Installation Labor | 321 | 316 | ||||||
| $ | 623 | $ | 686 | |||||
Our cost of goods sold decreased by $64,000, or 9%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. This decrease was the result of decreased hardware activity and fewer installation projects which carry a smaller margin profile than our services lines for the three months ended June 30, 2026 compared to the same period in 2025. Hosting and data center bandwidth costs increased by $63,000, or 91%, Remote Guarding costs increased by $44,000, or 96%, hardware costs decreased by $177,000, or 69%, and installation labor costs increased by $5,000, or 2% compared to the same period in 2025.
Operating Expenses
Our operating expenses for the three months ended June 30, 2026 and June 30, 2025 were as follows:
| Three Months Ended June 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| General and administrative | $ | 839 | $ | 993 | ||||
| Research and development | 570 | 539 | ||||||
| Sales and marketing | 943 | 622 | ||||||
| Operations | 359 | 171 | ||||||
| $ | 2,712 | $ | 2,324 | |||||
General and administrative expenses decreased by $154,000, or 16%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. This change was primarily due to an decrease of $148,000, or 22%, in Salaries and Benefits, a decrease in Professional Services of $49,000, or 37%, and offset by an increase of $43,000, or 388%, in Equipment.
Research and Development (“R&D”) expenses decreased by $31,000, or 6%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. This change was primarily due to a decrease of $30,000, or 19%, in Consulting Fees.
Sales and Marketing expenses increased by $321,000, or 52%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. This change was primarily due to an increase of $194,000, or 42%, in Salaries and Benefits, and an increase of $50,000, or 239%, in Consulting Fees.
Operations expenses increased by $188,000, or 110%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. This change was primarily due to an increase of $194,000, or 272%, in Salaries and Benefits related to increased headcount in the department.
| 39 |
Other Income / Expense
Change in fair value of derivative liabilities consists of non-cash gains and losses arising from the remeasurement of bifurcated derivative liabilities associated with the Company’s preferred stock at each reporting date and conversion date using a Monte Carlo simulation model. For the three months ended June 30, 2026, we experienced a gain on change in fair value of the derivative liability totaling $319,000. For the three months ended June 30, 2025, we experienced a loss on change in fair value of the derivative liability totaling $334,000.
Net Loss
As a result of the foregoing, the Company had a net loss of $1.73 million for the three months ended June 30, 2026, compared to a net loss of $2.19 million for the three months ended June 30, 2025, a loss decrease of 21% for the current period compared to the prior period. Gross profit increased by approximately 53%. Gross profit was $610,000 for the three months ended June 30, 2026 and $400,000 for the three months ended June 30, 2025.
As described in Note 2 to the condensed consolidated interim financial statements, the comparative financial information for the three months ended June 30, 2025 has been revised to correct errors related to the accounting for the Company’s Series 1 Shares and Series 2 Shares. The errors related solely to the technical classification of the instrument on the balance sheet and to the measurement of the embedded derivative liability, and had no impact on the Company’s cash position, liquidity, revenue, or operating expenses. It was always the intent of both the Company and Streeterville that the Series 1 Shares and the Series 2 Shares be classified as permanent equity. As a result, as described in Note 5, during the quarter ended June 30, 2026, the Company amended and restated the Series 2 Certificate of Designations to eliminate the contractual provisions that gave rise to the classification errors. Management believes these actions have effectively resolved the underlying accounting classification issues on a prospective basis.
Comparison of the six months ended June 30, 2026 to the six months ended June 30, 2025
Net Revenues
The majority of our net revenues for the six months ended June 30, 2026 were comprised of subscription revenue generated from our core business services (cloud video surveillance and remote guarding) and hardware sales.
The following table summarizes our revenue by service line:
|
Six Months Ended June 30, |
||||||||
| (in thousands) | 2026 | 2025 | ||||||
| Cloud Video Surveillance | $ | 748 | $ | 266 | ||||
| Remote Guarding | 654 | 243 | ||||||
| Hardware | 615 | 762 | ||||||
| Other (installation, door subscriptions, etc.) | 531 | 553 | ||||||
| $ | 2,548 | $ | 1,824 | |||||
Total revenue increased by $724,000, or 40%, for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. The Company increased the number of subscribing properties by 169% during the six months ended June 30, 2026 when compared to the same period in 2025. During the first half of 2026, cloud video subscriptions increased by $482,000, or 181%, Remote Guarding increased by $411,000, or 169%, hardware sales decreased by $147,000, or 19%, and installation sales and other sales decreased by $22,000, or 4%, over the same period in 2025.
| 40 |
Cost of Goods Sold
The following table summarizes our cost of goods sold:
| Six Months Ended June 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| Hosting and Data Center Bandwidth | $ | 255 | $ | 128 | ||||
| Remote Guarding | 154 | 89 | ||||||
| Hardware | 170 | 429 | ||||||
| Installation Labor | 648 | 448 | ||||||
| $ | 1,228 | $ | 1,094 | |||||
Our cost of goods sold increased by $134,000, or 12%, for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This increase was the result of more installation projects which consisted of less hardware and carried a smaller margin profile than our services lines for the six months ended June 30, 2026 compared to the same period in 2025. Hosting and data center bandwidth costs increased by $127,000, or 99%, Remote Guarding costs increased by $65,000, or 73%, hardware costs decreased by $259,000, or 60%, and installation labor costs increased by $200,000, or 45% compared to the same period in 2025.
Operating Expenses
Our operating expenses for the six months ended June 30, 2026 and June 30, 2025 were as follows:
| Six Months Ended June 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| General and administrative | $ | 2,222 | $ | 2,075 | ||||
| Research and development | 1,275 | 1,308 | ||||||
| Sales and marketing | 1,856 | 1,434 | ||||||
| Operations | 671 | 274 | ||||||
| $ | 6,025 | $ | 5,091 | |||||
General and administrative expenses increased by $147,000, or 7%, for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This change was primarily due to an increase of $103,000, or 681%, in Equipment, an d an increase in Professional Services of $61,000, or 45%, and offset by an decrease of $30,000, or 2%, in Salaries and Benefits.
Research and Development (“R&D”) expenses decreased by $33,000, or 3%, for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This change was primarily due to a decrease of $185,000, or 20%, in Salaries and Benefits, offset by an increase of $140,000, or 42%, in Consulting Fees.
Sales and Marketing expenses increased by $422,000, or 29%, for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This change was primarily due to an increase of $215,000, or 20%, in Salaries and Benefits, and an increase of $101,000, or 288%, in Consulting Fees.
Operations expenses increased by $397,000, or 145%, for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This change was primarily due to an increase of $363,000, or 279%, in Salaries and Benefits related to increased headcount in the department.
| 41 |
Other Income / Expense
Change in fair value of derivative liabilities consists of non-cash gains and losses arising from the remeasurement of bifurcated derivative liabilities associated with the Company’s preferred stock at each reporting date and conversion date using a Monte Carlo simulation model. For the six months ended June 30, 2026, we experienced a gain on change in fair value of the derivative liability totaling $191,000. For the six months ended June 30, 2025, we experienced a gain on change in fair value of the derivative liability totaling $81,000.
Net Loss
As a result of the foregoing, the Company had a net loss of $4.51 million for the six months ended June 30, 2026, compared to a net loss of $4.20 million for the six months ended June 30, 2025, a loss increase of 7% for the current period compared to the prior period. Gross profit increased by approximately 81%. Gross profit was $1,320,000 for the six months ended June 30, 2026 and $730,000 for the six months ended June 30, 2025.
As described in Note 2 to the condensed consolidated interim financial statements, the comparative financial information for the six months ended June 30, 2025 has been revised to correct errors related to the accounting for the Company’s Series 1 Shares and Series 2 Shares. The errors related solely to the technical classification of the instrument on the balance sheet and to the measurement of the embedded derivative liability, and had no impact on the Company’s cash position, liquidity, revenue, or operating expenses. It was always the intent of both the Company and Streeterville that the Series 1 Shares and the Series 2 Shares be classified as permanent equity. As a result, as described in Note 5, during the six months ended June 30, 2026, the Company amended and restated the Series 2 Certificate of Designations to eliminate the contractual provisions that gave rise to the classification errors. Management believes these actions have effectively resolved the underlying accounting classification issues on a prospective basis.
Off-Balance Sheet Arrangements
As of the date of this report, we have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Liquidity and Capital Resources
Overview
From inception, we have funded our operations principally through the net proceeds from sales of our capital stock and to a lesser extent from cash flows generated from operating activities.
| 42 |
Summary of Cash Flows
Operating Activities
We continue to experience negative cash flows from operations as we expand our business. Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our business in areas such as product and service development and selling, general and administrative. Our operating cash flows are also affected by our working capital needs to support growth and fluctuations in personnel-related expenditures, accounts payable and other current assets and liabilities.
Net cash used in operating activities for the six months ended June 30, 2026 was $4.46 million, which reflects our net loss of $4.51 million, increases in accounts receivable of $140,000, deposits and prepaid expenses of $334,000, deferred revenue of $84,000, and accrued expenses of $89,000 and offset by decreases in inventory of $22,000, accounts payable of $294,000, $791,000 of stock compensation expense, $55,000 of depreciation expense, and an increase in the fair value of derivative liabilities of $191,000.
Investing Activities
Our investing activities have consisted primarily of purchases of assets and equipment to support our headcount growth.
Net cash used in investing activities for the six months ended June 30, 2026 was $48,000, which was attributable to asset additions to colocation equipment for our Montana data center in the amount of $35,000 and $13,000 of equipment in India.
Financing Activities
Our net cash used in financing activities for the six months ended June 30, 2026 was $135,000 compared to $11.85 million of cash provided by financing activities for the same period in 2025. The cash used in financing activities during the six months ended June 30, 2026 was principally attributed to $145,000 of issuance costs offset by $10,000 of proceeds from issuance of Class A common shares.
On April 3, 2026, pursuant to the terms of our Series 2 Shares, we issued Streeterville an additional 120 Series 2 Shares as dividend payments.
| 43 |
Funding Requirements
We anticipate incurring additional losses for the foreseeable future, and we may never become profitable. We expect our operating expenses to continue to increase as we expand our business, particularly as we continue development of our existing and new products and services. In addition, we expect to continue to incur additional costs and expenses associated with being a public company.
As of June 30, 2026, we had approximately $3.81 million of cash on hand and approximately $4.52 million of working capital. We believe that our cash on hand, anticipated cash flows from operations, and financing available to us pursuant to the Equity Line and ATM Facility (subject to meeting the conditions of those financing arrangements) will be sufficient to meet our liquidity and capital resource requirements and continue operations for at least 12 months from the date of this report. Our ability to draw on these facilities is subject to a number of conditions, many of which are outside of our control, including satisfaction of share price thresholds, beneficial ownership limitations, and other closing conditions. There is no assurance that such financing will be available when needed or on terms acceptable to us. If we are unable to access these facilities or raise alternative financing, it would be necessary to seek other sources of debt or equity capital, which may not be available or may only be available on terms that would have a material adverse effect on our results of operations and financial condition.
The interim condensed consolidated unaudited financial statements included within this report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is dependent on our ability to further implement our business plan, raise capital, and generate revenues. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. We have incurred operating losses and negative cash flows from operations since inception. As of June 30, 2026, we had an accumulated deficit of approximately $55.8 million and cash and cash equivalents of approximately $3.81 million. Net cash used in operating activities was approximately $4.46 million for the six months ended June 30, 2026. Management expects to continue to incur operating losses and negative cash flows for the foreseeable future. In addition, as of the date of this report, the Exchange Note issued to Streeterville on June 30, 2026, in the original principal amount of $1,299,870, is subject to monthly redemptions of up to $108,332.50 (plus accrued interest), which will require cash payments or conversions of debt to equity that may be dilutive to existing stockholders. A delisting of our Class A common stock from Nasdaq would constitute an event of default under the Exchange Note, potentially accelerating the outstanding balance and increasing it by 10%, which would further strain our liquidity.
We have based the foregoing estimates on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect. We have a planning and budgeting process in place to monitor our operating cash requirements, including amounts projected for capital expenditures, which are adjusted as our future funding requirements change. These funding requirements include, but are not limited to, our product and service development, our general and administrative requirements, and the costs of operating as a public company, and are offset by our ability to generate revenue from operations and the availability of equity or debt financing.
| 44 |
Contractual Obligations and Commitments
In addition to ongoing capital expenditures and working capital needs to fund operations over the next 12 months, our contractual obligations to make future payments primarily relate to our operating lease obligations, capital lease obligations and insurance obligations, all of which are governed by agreements with month-to-month terms, and which are generally terminable after a notice period at any time. We purchase equipment, software and inventory necessary to conduct our operations on an as-needed basis.
Emerging Growth Company
We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting and disclosure requirements that are applicable to public companies that are not emerging growth companies, and we have elected to take advantage of those exemptions. For so long as we remain an emerging growth company, we will not be required to:
| · | have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); | |
| · | submit certain executive compensation matters to Member advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding Member vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding Member vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; or | |
| · | disclose certain executive compensation related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means that an emerging growth company can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We have elected to take advantage of the extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
We will remain an emerging growth company for up to the last day of the fiscal year following the fifth anniversary of our direct listing on Nasdaq, or until the earliest of: (i) the last date of the fiscal year during which we had total annual gross revenues of $1.235 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iii) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Exchange Act.
We do not believe that being an emerging growth company will have a significant impact on our business. Also, even once we are no longer an emerging growth company, we still may not be subject to auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act unless we meet the definition of a large accelerated filer or an accelerated filer under Section 12b-2 of the Exchange Act.
| 45 |
Critical Accounting Estimates
Our accounting and recording policies are in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe the following critical accounting estimate involves the most significant judgments and estimates used in the preparation of our condensed consolidated financial statements.
| · | Fair Value of Bifurcated Derivative Liabilities. Prior to the June 29, 2026 amendment of the terms of the Series 2 Shares, the Company was required to bifurcate the embedded conversion feature and measure it at fair value at each reporting date using a Monte Carlo simulation model with Level 3 unobservable inputs, including 90-day trailing realized equity volatility, an estimated sell-rate as a fraction of average daily trading volume, and the contractual floor price. These inputs required significant management judgment, and changes in the assumptions could materially affect the estimated fair value and, consequently, the gain or loss recognized in earnings. For the three months ended June 30, 2026, the net change in fair value of the derivative liability recognized in earnings was a gain of $319,000. As of June 30, 2026, the derivative liability balance was $0 following the amendment and exchange transactions described in Notes 5 and 9 to the condensed consolidated financial statements. While the derivative liability has been extinguished as of the balance sheet date, this estimate was critical to the comparative period results and to the revised prior period financial information presented in this report. | |
| The most significant driver of fair value was the assumed sell-rate, which determined the expected pace of conversion and the resulting dilutive impact on common stockholders. An increase in the sell-rate assumption from 20% to 30% of average daily trading volume would have increased the estimated fair value, while a decrease to 10% would have decreased it. The 90-day trailing realized equity volatility of 90% was derived from observable market data but was classified as Level 3 because it was a significant input to a model-based valuation that also relied on unobservable inputs. For additional information regarding the valuation methodology, significant inputs, and sensitivity analysis, see Note 2 to the condensed consolidated financial statements. |
Our other significant accounting policies are described in “Note 2 — Summary of Significant Accounting Policies.” The recent accounting changes that may potentially impact our business are described under “Recent Accounting Pronouncements” in “Note 2 — Summary of Significant Accounting Policies.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, and as a result are not required to provide the information required by this Item.
| 46 |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated, as of the end of the period covered by this report, the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2026, due to the material weakness in internal control over financial reporting described below.
Material Weakness
As previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2026, in connection with the preparation of the condensed consolidated interim financial statements for that quarter, management identified a material weakness in the Company's internal control over financial reporting relating to the accounting for complex equity-linked financial instruments. Specifically, the Company did not maintain sufficient technical accounting resources with the expertise necessary to evaluate the classification of embedded features under ASC 815-15, the indexation criteria under ASC 815-40-15, and the mezzanine classification requirements under ASC 480-10-S99-3A. As a result, the Company failed to bifurcate and separately account for embedded conversion features as derivative liabilities and incorrectly classified the preferred stock host instruments in permanent stockholders' equity rather than in temporary equity (mezzanine).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding this material weakness, management has concluded that the condensed consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with U.S. generally accepted accounting principles.
Remediation
Management, under the oversight of the Audit Committee of the Board of Directors, is continuing to implement the remediation plan described in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2026 to address the material weakness. Additionally, as described in Note 5, on June 29, 2026, the Company amended and restated the terms of the Series 2 Convertible Preferred Stock to eliminate the contractual provisions that gave rise to the accounting classification errors, and believes the amended terms support permanent equity classification on a prospective basis. This action, while not itself a remediation of the control deficiency, eliminates the ongoing financial statement risk from the instrument.
The material weakness will not be considered remediated until the applicable remedial controls have operated for a sufficient period of time and management has concluded that these controls are operating effectively. Management continues to anticipate that the material weakness will be remediated no earlier than December 31, 2026. There can be no assurance these remediation measures will be successful or that additional actions will not be required.
| 47 |
CLOUDASTRUCTURE, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be party to litigation arising in the ordinary course of business. As of June 30, 2026, we are not subject to any material legal proceedings nor, to the best of our knowledge, are any material legal proceedings pending or threatened against us.
Item 1A. Risk Factors.
This report should be read in conjunction with Part I – Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2025, as supplemented by the risk factors disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2026. There have been no material changes in our risk factors from those previously disclosed, except as set forth below, which update and supersede the corresponding risk factors in our prior filings.
We have identified a material weakness in our internal control over financial reporting, which could adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
As previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2026, and as further described in Part I, Item 4 of this report, we identified a material weakness in our internal control over financial reporting related to the accounting for complex equity-linked financial instruments. A material weakness is a deficiency, or a 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.
We are implementing remediation measures as described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2026. However, we cannot assure you that these measures will be sufficient to remediate the material weakness or prevent future material weaknesses. The material weakness will not be considered remediated until the applicable remedial controls have operated for a sufficient period of time and management has concluded that these controls are operating effectively, which we currently expect will not occur before December 31, 2026.
If we are unable to remediate the material weakness in a timely manner, or if we identify additional material weaknesses or significant deficiencies in our internal controls, our ability to produce timely and accurate financial statements may be impaired, which could adversely affect investor confidence, our stock price, and our ability to access the capital markets. The existence of a material weakness could also increase the risk that we may need to revise previously issued financial statements and could subject us to litigation or regulatory proceedings.
There is a risk that our Class A common stock may be delisted from Nasdaq, which would adversely affect the liquidity and market price of our Class A common stock and our ability to raise capital.
Our Class A common stock is listed on The Nasdaq Capital Market. To maintain our listing, we must satisfy certain continued listing requirements, including a minimum bid price of $1.00 per share under Nasdaq Listing Rule 5550(a)(2) and maintenance of a minimum Market Value of Listed Securities (“MVLS”) of at least $5 million under Nasdaq Listing Rule 5550(a)(6).
| 48 |
As previously disclosed, on February 17, 2026, we received a notification from The Nasdaq Stock Market LLC ("Nasdaq") that we were not in compliance with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). On July 31, 2026, we effected a 1-for-30 reverse stock split of our Class A common stock, which was intended to increase the per-share trading price of our Class A common stock to regain compliance with the minimum bid price requirement. On August 14, 2026, Nasdaq confirmed that we had regained compliance with Listing Rule 5550(a)(2) because the closing bid price of our Class A common stock was at $1.00 per share or greater for 10 consecutive business days from July 31 through August 13, 2026, and that the matter was closed. Although we have regained compliance with the minimum bid price requirement, there can be no assurance that we will maintain compliance on a sustained basis. If the closing bid price of our Class A common stock falls below $1.00 per share for 30 consecutive business days, Nasdaq would issue a new deficiency notice. A reverse stock split may not result in a stock price that is proportionate to the reduction in shares outstanding over the long term.
In addition, on July 22, 2026, the SEC approved Nasdaq’s proposed Listing Rule 5550(a)(6), which requires all companies listed on The Nasdaq Capital Market to maintain a minimum MVLS of at least $5 million on a continuous basis. MVLS is calculated as the consolidated closing bid price of a share multiplied by the number of shares listed on Nasdaq or another national securities exchange. Under the new rule, if a company’s MVLS falls below $5 million for 30 consecutive business days, Nasdaq will issue a Staff Delisting Determination and immediately suspend trading in the company’s securities and commence delisting proceedings. Unlike other continued listing deficiencies, there is no cure or compliance period to regain the $5 million MVLS level, a request for a Hearings Panel review does not automatically stay the suspension of trading, and the Hearings Panel’s authority to grant relief is limited. On August 6, 2026, the SEC stayed the approval order pending further review of the rule; accordingly, as of the date of this report, the MVLS requirement has not yet taken effect. However, if the SEC lifts the stay and the rule becomes operative, the Company’s ability to maintain compliance with the MVLS requirement would depend on its stock price and the number of shares listed on Nasdaq. As of June 30, 2026, the Company’s estimated MVLS was approximately $5.7 million. Following the 1-for-30 reverse stock split effected July 31, 2026, the number of listed shares was reduced to approximately 833,075, and the Company’s MVLS will be directly affected by the post-split trading price of our Class A common stock. If the MVLS rule becomes operative, even a modest decline in our stock price could cause our MVLS to fall below the $5 million threshold, triggering immediate suspension and delisting proceedings without any opportunity to cure.
If our Class A common stock were to be delisted from Nasdaq, trading in our shares would likely be conducted in the over-the-counter market, which typically involves less liquidity, wider bid-ask spreads, and reduced analyst coverage. A delisting would also likely trigger events of default or trigger events under our outstanding Exchange Note (see Notes 5 and 9 to the financial statements), impair our ability to raise capital through equity or debt financings (including pursuant to our existing Equity Line and ATM Facility), adversely affect the market price of our Class A common stock, and reduce investor confidence.
In addition, on June 30, 2026, the Company issued the Exchange Note to Streeterville in the original principal amount of $1,299,870. The Exchange Note contains events of default that include, among other things, the delisting of our Class A common stock from Nasdaq. If a delisting were to occur, Streeterville could accelerate the Exchange Note, and the outstanding balance would automatically increase by 10%. As of the date of this report, Streeterville has exercised its first monthly redemption right, reducing the outstanding principal balance to approximately $1,191,538 plus accrued interest. The monthly redemption rights of up to $108,332.50 (plus accrued interest) per calendar month will require the Company to make cash payments or issue shares of Class A common stock to Streeterville, which could be dilutive to existing stockholders, particularly if our stock price declines. These obligations, combined with the Company’s limited cash resources, create additional liquidity risk.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| (a) | Unregistered sales of equity securities: On August 6, 2026, the Company entered into an Exchange Agreement with Streeterville Capital, LLC (“Streeterville”), pursuant to which the Company and Streeterville agreed to partition a new promissory note (the “Partitioned Note”) in the original principal amount of $108,332.50 from that certain Promissory Note dated June 30, 2026, in the original principal amount of $1,299,870.00, and to exchange the Partitioned Note for 22,297 shares of the Company’s Class A common stock, par value $0.0001 per share (the “Exchange Shares”). Pursuant to the Exchange Agreement, Streeterville agreed to surrender the Partitioned Note in exchange for the Exchange Shares, which are to be delivered to Streeterville on or before August 10, 2026. On the Free Trading Date (as defined in the Exchange Agreement), the Partitioned Note will be cancelled and all obligations of the Company under the Partitioned Note will be deemed fulfilled. No additional consideration was paid by Streeterville in connection with the exchange. The issuance of the Exchange Shares was exempt from registration under Section 3(a)(9) of the Securities Act. | |
| (b) | Use of proceeds: Not applicable. | |
| (c) | Issuer purchases of equity securities: None. |
| 49 |
Item 5. Other Information.
| (a) | None. | |
| (b) | None. | |
| (c) | During the quarter ended June 30, 2026, no director or officer |
Item 6. Exhibits.
The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
| 3.1 | Amended and Restated Certificate of Designations of Preferences and Rights of Series 2 Convertible Preferred Stock, effective June 29, 2026 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2026) | |
| 10.1 | Exchange Agreement between Cloudastructure, Inc. and Streeterville Capital, LLC dated June 30, 2026 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2026) | |
| 10.2 | Promissory Note issued by Cloudastructure, Inc. to Streeterville Capital, LLC dated June 30, 2026 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2026) | |
| 10.3# | Amendment to Cloudastructure, Inc. Amended and Restated 2024 Equity Incentive Plan, adopted by the Board of Directors on May 21, 2026, and approved by stockholders July 15, 2026 (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the SEC on June 2, 2026) | |
| 31 | Certifications. | |
| (a) | Certificate of the Chief Executive Officer of Cloudastructure, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| (b) | Certificate of the Chief Financial Officer of Cloudastructure, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| 32 | Certifications. | |
| (a) | Certificate of the Chief Executive Officer of Cloudastructure, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| (b) | Certificate of the Chief Financial Officer of Cloudastructure, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| 101 | Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language). | |
| (INS) | iXBRL Instance Document. | |
| (SCH) | iXBRL Schema Document. | |
| (CAL) | iXBRL Taxonomy Extension Calculation Linkbase Document. | |
| (LAB) | iXBRL Taxonomy Extension Label Linkbase Document. | |
| (PRE) | iXBRL Taxonomy Extension Presentation Linkbase Document. | |
| (DEF) | iXBRL Taxonomy Extension Definition Linkbase Document. | |
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document). | |
# Indicates management contract or compensatory plan or arrangement
| 50 |
CLOUDASTRUCTURE, INC.
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.
| CLOUDASTRUCTURE, INC. | ||
| Date: August 17, 2026 | By: | /s/ James McCormick |
| James McCormick | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 17, 2026 | By: | /s/ Greg Smitherman |
| Greg Smitherman | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and | ||
| Principal Accounting Officer) | ||
| 51 |