Airship AI Holdings, Inc. (AISP)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Overview

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

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

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

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

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

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

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

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

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

Recent Developments

On June 3, 2024, we permanently reduced the exercise price of our outstanding public warrants and private warrants, previously exercisable at $11.50 per share, to an exercise price of $7.80 per share. On November 20, 2024, we further reduced the exercise price of our outstanding public warrants and private warrants to an exercise price of $4.50 per share. The purpose of this reduced exercise price was to potentially raise proceeds received from the exercise of such warrants, if any, for working capital and general corporate purposes.

On June 22, 2024, we entered into an extension agreement with Platinum Capital Partner, Inc. to extend the maturity date of a $2,000,000 senior secured convertible promissory note to June 22, 2025. In consideration for entering into the extension agreement, we issued to Platinum 232,360 shares of common stock in payment of all interest and extension fees through June 22, 2025. As of December 31, 2024, the $2,000,000 principal balance of the senior secured convertible note was converted to equity. During the year ended December 31, 2024, we issued 879,051 shares of common stock related to the conversion.

On September 3, 2024, we closed an offering of $8 million consisting of 2,882,883 shares of common stock and 2,882,883 common warrants to purchase up to 2,882,883 shares of common stock at a combined offering price of $2.775 per share and common stock warrant.  The Company received net proceeds of approximately $7.3 million, after deducting the estimated offering expenses payable by us, including the placement agent fees. We intend to use the net proceeds from the offering for working capital and general corporate purposes, including cost of goods sold purchases, personnel and product development.

On September 27, 2024, the Company entered into a master loan agreement with Mr. Huang, whereby he may provide additional funding of up to $1,500,000 under certain terms and conditions. The agreement provides for interest of 6%. We agreed to pay interest for the 2024 advances of $11,913 and issued warrants to purchase up to 220,000 shares of common stock. The warrants have an exercise price of $2.36 per share, are exercisable immediately upon issuance and will expire in five years following the date of issuance. There are no outstanding advances under this master loan agreement as of December 31, 2024.

On December 24, 2024, we entered into a warrant exercise inducement agreement with a holder of  existing common stock warrants exercisable for an aggregate of 2,882,883 shares of common stock at the existing exercise price of $2.65 per share (collectively, the “Existing Warrants”), in exchange for the issuance of new common stock warrants to purchase 2,162,162 shares of common stock at an exercise price per share of $4.50 (collectively, the “Inducement Warrants”). The investor agreed to exercise the existing 2,882,883 warrants for cash resulting in aggregate gross proceeds of approximately $7.6 million with approximately $7.4 million in net proceeds after deducting advisory fees. The Inducement Warrants are immediately exercisable and will be exercisable for five years from the date of issuance.

As of September 30, 2024, we determined the First Operating Performance Milestone of the earnout shares was achieved and 1,250,000 shares of our common stock were issued to applicable personnel on January 7, 2025.

Key Performance Indicators

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

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

Principal Factors Affecting Our Financial Performance

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

Segment Reporting

The Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Chief Executive Officer, Chief Financial Officer and President are the Company’s CODM. The CODM monitors the revenue and expense components of the various products and services we offer, but operations are managed and financial performance is evaluated on a corporation-wide basis in comparison to a business plan which is developed each year. Accordingly, all operations are considered by management to be one operating segment and one reportable segment as contained in the Consolidated Statements of Operations and Comprehensive Loss to the consolidated financial statements. The CODM uses consolidated net income (loss) as its required measure of segment profit/loss, as such measure is determined in accordance with the measurement principles most consistent with the consolidated financial statements.

Results of Operations

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

(dollars in thousands)

Net Revenues — Net revenues for the year ended December 31, 2024 increased $10,750,000 to $23,050,000 as compared to $12,300,000 for the year ended December 31, 2023, as a result of increased product sales. We received purchase orders from various federal government agency customers totaling over $16 million which we shipped in the year ended December 31, 2024.

Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support. For the year ended December 31, 2024, cost of sales increased $5,987,000 to $12,523,000 as compared to $6,536,000 for the year ended December 31, 2023. The increase was due to higher product sales and product mix with increased equipment purchases during the year ended December 31, 2024.

Research and Development Expenses — Research and development expenses for the year ended December 31, 2024 increased $76,000 to $2,805,000 as compared to $2,729,000 for the year ended December 31, 2023. The increase was due to increased expenses for product development.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the year ended December 31, 2024 increased $1,552,000 to $11,227,000 as compared to $9,675,000 for the year ended December 31, 2023. The increase was due to (i) increased insurance costs of $626,000; (ii) increased professional fees of $944,000, primarily related to the merger and the Nasdaq listing; (iii) increased other operating expenses of $1,471,000 including higher wages and other costs associated with the Nasdaq listing; and offset by (iv) decreased stock based compensation of $1,489,000. The stock based compensation during the year ended December 31, 2023 included warrants to purchase common stock issued on May 8, 2023 for 765,000 shares to each of the two founders valued at $2,136,000.

Other Expense — Other expense for the year ended December 31, 2024 was $53,960,000 as compared to other income of $23,011,000 for the year ended December 31, 2023. Other expense for the year ended December 31, 2024 consisted of (i) loss from change in fair value of earnout liability of $18,171,000; (ii) loss from change in fair value of warrant liability of $33,513,000; (iii) loss from change in fair value of convertible debt of $142,000; (iv) loss on note conversion of $1,145,000; (v) interest expense of $1,003,000: and offset by (vi) other income of $14,000. The loss from change in fair value of various financial instruments was primarily the result of an increase in the stock price.

Other income for the year ended December 31, 2023 consisted of (i) gain from change in fair value of warrant liability of $1,341,000; (ii) gain from change in fair value of earnout liability of $21,977,000; and offset by (iii) unrealized loss for increase in fair value of convertible promissory note of $241,000 and (iv) noncash interest and other, net of $66,000. The gain from change in fair value of various financial instruments was primarily the result of a decrease in the stock price from the merger date to December 31, 2023.

Net Loss — Net loss for the year ended December 31, 2024 was $57,465,000 as compared to a net income of $16,371,000 for the year ended December 31, 2023. The net loss primarily related to noncash items of   $55,766 ,000. Noncash items included (i) depreciation of $2,000; (ii) stock based compensation of $1,363,000; (iii) net amortization of operating lease right of use asset of $223,000; (iv) issuance of common stock for services of $199,000; (v) noncash interest expense of $1,008,000; (vi) loss from change in warrant liability of $33,513,000; (vii) loss from change in earnout liability of $18,171,000; (viii) loss from change in fair value of convertible note of $142,000; and (ix) loss on note conversions of $1,145,000.

The net income for the year ended December 31, 2023 included noncash income of $19,627,000.

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

Liquidity is our ability to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. We have incurred losses from operations in the past few years and had an accumulated deficit of $74.9 million as of December 31, 2024. As disclosed in Note 1, in September 2024, we closed an $8 million public offering with approximately $7.3 million in net proceeds. In December 2024, we received net proceeds of approximately $7.4 million from the exercise of warrants related to an inducement offer agreement. We formally evaluated our liquidity and cash position in February 2025 when preparing the December 31, 2024 audited consolidated financial statements. During this process, we analyzed our cash requirements and operations at least through February 2026 and determined that, based upon our current available cash and operations, we have no substantial doubt about our ability to continue as a going concern. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of our near and long-term future capital requirements that will depend on many factors.

Operating Activities

Net cash used in operating activities for the year ended December 31, 2024 was $6,504,000. This amount was primarily related to (i) net loss of $57,465,000; and (ii) net working capital reductions of $4,804,000 (including a $2,780,000 reduction in deferred revenues); offset by (iii) noncash items of $55,766,000. Noncash items included (iv) depreciation of $2,000; (v) stock based compensation of $1,363,000; (vi) net amortization of operating lease right of use asset of $223,000; (vii) issuance of common stock for services of $199,000; (viii) noncash interest expense of $1,008,000; (ix) loss from change in warrant liability of $33,513,000; (x) loss from change in earnout liability of $18,171,000; (xi) loss from change in fair value of convertible note of $142,000; and (xii) loss on note conversions of $1,145,000.

Net cash used in operating activities for the year ended December 31, 2023 was $3,291,000. This amount was primarily related to (i) net income of $16,371,000; (ii) depreciation of $15,000; (iii) stock based compensation of $2,852,000; (iv) net amortization of operating lease right of use asset of $597,000; (v) unrealized loss for increase in fair value of convertible promissory note of $240,000; (vi) non cash interest, net of $65,000; offset by (vii) gain from change in fair value of warrant liability of $1,341,000; (viii) gain from change in fair value of earnout liability of $21,976,000; and (ix) working capital changes of $36,000.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024 was $14,785,000 and consisted of (i) net proceeds from offering of $7,290,000; (ii) net proceeds from exercise of warrants of $7,705,000; and (iii) proceeds from stock option exercises of $240,000; offset by repayment of advances by founders of $450,000.

Net cash provided by financing activities for the year ended December 31, 2023 was $6,120,000 and consisted of (i) issuance of a senior secured convertible promissory note of $2,585,000; (ii) net advances provided by the founders of $1,150,000; (iii) proceeds from reverse capitalization of $2,800,000; and offset by (iv) the payoff of small business loan and line of credit of $425,000.

Debt Financing Arrangements

On June 22, 2023, we entered into a senior secured convertible promissory note with Platinum Capital Partners Inc. and received $2,000,000.

On February 2, 2024, we issued an amended and restated senior secured convertible promissory note to Platinum in the principal amount of $2,000,000 primarily to adjust the conversion price per share to the lower of (i) $3.69717, subject to appropriate adjustment as provided in the note, and (ii) 65% of the VWAP of the common stock for the five trading days immediately prior to any conversion, but in no event below $2.27518, subject to appropriate adjustment as provided in the note. The note contained “weighted average” anti-dilution protection for issuances of shares of common stock or common stock equivalents at a price less than the conversion price then in effect.

On June 22, 2024, we entered into an extension agreement with Platinum Capital Partner, Inc. to extend the maturity date of the $2,000,000 senior secured convertible promissory note to June 22, 2025. In consideration for entering into the extension agreement, we issued to Platinum 232,360 shares of common stock in payment of all interest and extension fees through June 22, 2025. As of December 31, 2024, the Platinum convertible note was fully converted to equity. We issued 879,051 shares of common stock related to the conversion.

On October 3, 2023, we issued senior secured convertible promissory notes for $600,000 to two private investors. At the option of the holders, the notes were convertible into cash, common stock or a combination of cash and stock. On March 5, 2024, the two private investors converted the notes with a face value of $600,000 and interest into 169,204 shares of the Company’s common stock valued at $835,610. On September 13, 2024, we issued an additional 86,198 shares of our common stock related to the conversion of notes at $2.65 per share. We recognized a loss on debt conversion of $393,253 during the year ended December 31, 2024.

Contractual Obligations and Commitments

On July 13, 2023, we entered into a lease in Redmond, WA for 15,567 square feet of office and warehouse space which started on October 1, 2023. The monthly payment is $25,000 per month. The lease expires October 31, 2027 and the monthly payment increases 3% on July 31, 2024 and each year thereafter. There is a one three year option to extend the lease based on the fair market rate on October 31, 2027. We do not believe that is reasonably certain that the lease will be extended.

On February 29, 2024, we extended an office lease in Mooresville, North Carolina. We lease 3,621 square feet and the net monthly payment is $6,488. On August 27, 2024, we extended the lease to February 28, 2025. We will exit this location on February 28, 2025.

On February 1, 2025, we entered into an office lease in Mooresville, North Carolina. We lease 5,240 square feet and the net monthly payment is $9,105. The lease expires January 31, 2028 and the monthly payment increases 3% on February 1, 2026 and each year thereafter. There is no option to extend the lease.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

We believe that the significant accounting policies described in “Note 2, Summary of Significant Accounting Policies” to our audited consolidated financial statements are accurate and complete.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

Income Taxes

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

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

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

Stock Based Compensation

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

Fair Value Measurements

Fair value is 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. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

We recorded our senior secured convertible promissory note, earnout liability (unvested earnout shares), public and private placement warrants and the warrants that were issued with the senior secured convertible note at fair value, remeasured on a recurring basis  The senior secured convertible note was fully converted to equity as of December 31, 2024. The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2024 and 2023 are based upon the short-term nature of the assets and liabilities.

The Company classifies as liabilities any contracts that (i) require net-cash settlement (including a requirement to net- cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

Recent Accounting Pronouncements

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

On December 21, 2023, the Company entered into the Merger Agreement which is summarized in Note 13— Reverse Recapitalization, of the audited consolidated financial statements included elsewhere in this report. The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Overview

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

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

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

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

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

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

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

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

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

Recent Developments

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

Key Performance Indicators

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

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

Principal Factors Affecting Our Financial Performance

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

Segment Reporting

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

Results of Operations

The following table sets forth key components of our results of operations during the years ended December 31, 2023 and 2022.

(dollars in thousands)

Net Revenues — Revenues for the year ended December 31, 2023 decreased $2,249,000 to $12,300,000 as compared to $14,549,000 for the year ended December 31, 2022, as a result of lower product sales. We have also recently received purchase orders from various government agency customers totaling over $13 million from which we expect to start receiving cash in the first quarter of 2024. As a result of supply chain issues that existed at December 31, 2021, we were unable to fulfill many orders and had a backlog of new orders of $6.8 million that shipped during the year ended December 31, 2022.

Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support. For the year ended December 31, 2023, cost of sales increased $408,000 to $6,536,000 as compared to $6,128,000 for the year ended December 31, 2022. The increase was due to higher product costs and increased post contract support costs.

Research and Development Expenses — Research and development expenses for the year ended December 31, 2023 decreased $886,000 to $2,729,000 as compared to $3,615,000 for the year ended December 31, 2022. The decrease was due to reduced personnel (17 personnel as compared to 18 personnel) and reduced funding of $694,000 of the AI expenses in Taiwan.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the year ended December 31, 2023 increased $2,045,000 to $9,675,000 as compared to $7,630,000 for the year ended December 31, 2022. The increase was due to (i) increased stock based compensation of $2,305,000; and offset by (iii) reduced other expenses of $260,000. The stock based compensation increase includes $2,100,000 for warrants to purchase 1,344,951 shares of common stock issued to each of Victor Huang and Derek Xu.

Other Income — Other income for the year ended December 31, 2023 was $23,011,000 as compared to other income of $2,347,000 for the year ended December 31, 2022. Other income for the year ended December 31, 2023 consisted of (i) gain from change in fair value of warrant liability of $1,341,000; (ii) gain from change in fair value of earnout liability of $21,977,000; and offset by (iii) unrealized loss for increase in fair value of convertible promissory note of $241,000 and (iv) noncash interest and other, net of $66,000.

Other income for the year ended December 31, 2022 related primarily to (i) gain on forgiveness of Paycheck Protection Program loan of $1,146,000 and (ii) $1,233,000 income from employee retention tax credit.

Net Income (Loss) — Net income for the year ended December 31, 2023 was $16,371,000 as compared to net loss of $487,000 for the year ended December 31, 2022. The change was the result of $2.7 million lower gross profit in 2023 from decreased revenue and higher cost of revenue, higher operating expenses in 2023 of $1.2 million due mostly to increased stock based compensation offset by $20.6 million increase in other income as discussed in other income above. The net income for the year ended December 31, 2023 included noncash income of $19,627,000. Net loss for the year ended December 31, 2022 included net noncash expenses of $50,000.

Liquidity and Capital Resources as of December 31, 2023 and 2022

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. We formally evaluated our liquidity and cash position most recently in March 2024 when preparing our December 31, 2023 audited financial statements. During this process we concluded, based upon existing assets and liabilities, our order backlog and projections, plus the ability to borrow up to $2.5 million in short term loans from our founder, that we would be able to operate at least for the next twelve months. We have also recently received purchase orders from various government agency customers totaling over $13 million from which we expect to start receiving cash in the first quarter of 2024.

As of December 31, 2023, we had cash of approximately $3,124,000 and net capital deficit of approximately $6,174,000. The net working capital deficit includes a couple of items that are expected to require limited future cash outlays including current portion of deferred revenue totaling $4,009,000 and convertible debt totaling $2,825,000 which we expect to be converted to equity. As of December 31, 2023, we had an accumulated deficit of $16,582,000. On December 21, 2023, the merger with BYTS closed from which we received $2.8 million in net proceeds. Airship AI Holdings, Inc. became the accounting acquiror.

a. Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was $3,291,000. This amount was primarily related to (i) net income of $16,371,000; (ii) depreciation of $15,000; (iii) stock based compensation of $2,852,000; (iv) net amortization of operating lease right of use asset of $597,000; (v) unrealized loss for increase in fair value of convertible promissory note of $240,000; (vi) non cash interest, net of $65,000; offset by (vii) gain from change in fair value of warrant liability of $1,341,000; (viii) gain from change in fair value of earnout liability of $21,976,000; and (ix) working capital changes of $36,000.

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

b. Financing Activities

Net cash provided by financing activities for the year ended December 31, 2023 was $6,120,000 and consisted of (i) issuance of a senior secured convertible promissory note of $2,585,000; (ii) net advances provided by the founders of $1,150,000; (iii) proceeds from reverse capitalization of $2,800,000; and offset by (iv) the payoff of small business loan and line of credit of $425,000.

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

Our contractual cash obligations as of December 31, 2023 (excluding debt financing arrangements below) are summarized in the table below:

Debt Financing Arrangements

On June 22, 2023, we entered into a Senior Secured Convertible Promissory Note with Platinum Capital Partners Inc. and received $2,000,000. As a condition of funding, we paid off three small notes and accounts payable totaling $374,000.  At the option of the holder, the note is convertible into cash, common stock or a combination of cash and stock. We expect the convertible debt to be converted to equity.

On November 2 2023, we issued senior secured convertible promissory notes for $600,000 to two private investors. At the option of the holders, the notes are convertible into cash, common stock or a combination of cash and stock. On March 5, 2024, the two private investors converted the debt to equity.

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

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

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

Contractual Obligations and Commitments

On July 13, 2023, we entered into a lease in Redmond, WA for 15,567 square feet of office and warehouse space which started October 1, 2023. The monthly payment is $25,000 per month. The lease expires October 31, 2027 and the monthly payment increases 3% on July 31, 2024 and each year thereafter. There is a one three year option to extend based on the fair market rate on October 31, 2027.

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

Income Taxes

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

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

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

Stock Based Compensation

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

Fair Value Measurements

Fair value is 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. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2023 and 2022 are based upon the short-term nature of the assets and liabilities. The Company recorded its Senior Secured Convertible Promissory Note, earnout liability, Private Warrants and the warrants that were issued with this Note at fair value, remeasured on a recurring basis.

The Company classifies as liabilities any contracts that (i) require net-cash settlement (including a requirement to net- cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

Recent Accounting Pronouncements

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

References to the “Company,”
“our,” “us” or “we” refer to BYTE Acquisition Corp. The following discussion and analysis of the Company’s
financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related
thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain
information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special
Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form
10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on
our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar expressions. Such statements include, but are not limited to, possible
business combinations and the financing thereof, and related matters, as well as all other statements other than statements of historical
fact included in this Form 10-K. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described
in our other Securities and Exchange Commission (“SEC”) filings.

Overview

We are a blank check company
incorporated on January 8, 2021 as a Cayman Islands exempted company for the purpose of effecting a merger, share exchange, asset acquisition,
share purchase, reorganization or similar business combination with one or more businesses or entities (the “Business Combination”),
that we have not yet identified. While we may pursue an initial business combination target in any business or industry, we intent to
focus our search for targets in the Israeli technology industry, including those engaged in cybersecurity, automotive technology, fintech,
enterprise software, cloud computing, semiconductors, medical technology, AI and robotics and that offer a differentiated technology platform
and products. Our sponsor is Byte Holdings LP, a Cayman Islands exempted limited partnership (our “Sponsor”).

Our registration statement
for our initial public offering was declared effective on March 17, 2021. On March 23, 2021, we consummated its Initial Public Offering
of 30,000,000 units (the “Units” and, with respect to the Class A ordinary shares included in the Units being offered, the
“Public Shares”), at $10.00 per Unit, generating gross proceeds of $300.0 million, and incurring offering costs of approximately
$17.2 million, inclusive of approximately $10.5 million in deferred underwriting commissions. On April 7, 2021, the underwriter exercised
the over-allotment option in part and purchased an additional 2,369,251 Units (the “Over-Allotment Units”), generating additional
gross proceeds of $23,692,510 (such offering, including the exercise of the over-allotment, the “Initial Public Offering”).

Simultaneously with the closing
of the Initial Public Offering, we consummated the private placement (“Private Placement”) of 1,030,000 Units (the “Private
Placement Units”) at a price of $10.00 per Private Placement Unit, generating total gross proceeds of $10.3 million.

Upon the closing of the Initial
Public Offering, sale of the Over-Allotment Units, and the Private Placement, $323.7 million ($10.00 per Unit) of the net proceeds of
the sale of the Units in the Initial Public Offering and certain of proceeds of the Private Placement were placed in a trust account (“Trust
Account”) with Continental Stock Transfer & Trust Company acting as trustee and invested in United States “government
securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 185 days or less or in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S.
government treasury obligations, as determined by us, until the earlier of: (i) the completion of a Business Combination and (ii) the
distribution of the Trust Account to the shareholders.

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If we are unable to complete
a Business Combination by the Extended Date, we will (i) cease all operations except for the purpose of winding up, (ii) as promptly as
reasonably possible but no more than 10 business days thereafter, redeem 100% of the outstanding Public Shares, at a per-share price,
payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned (less taxes payable and
up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will
completely extinguish public shareholders’ rights as shareholders (including the right to receive further liquidation distributions,
if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders
and our board of directors, dissolve and liquidate, subject in each case to its obligations under Cayman Islands law to provide for claims
of creditors and the requirements of other applicable law.

Results of Operations

Our entire activity since
inception through December 31, 2022 related to our formation, the preparation for the Initial Public Offering, and since the closing of
the Initial Public Offering, the search for a prospective initial Business Combination. We have neither engaged in any operations nor
generated any revenues to date. We will not generate any operating revenues until after completion of our initial Business Combination.
We will generate non-operating income in the form of interest income on cash and cash equivalents. We expect to incur increased expenses
as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence
expenses.

For the year ended December
31, 2022, we had net income of approximately $10.6 million, which primarily consisted of a noncash gain of approximately $7.5 million
resulting from changes in fair value of derivative warrant liabilities and income from investments held in the Trust Account of approximately
$4.5 million, partially offset by approximately $1.4 million of general and administrative expenses, including $120,000 of general and
administrative expenses to related parties.

For the period from January
8, 2021 (inception) through December 31, 2021, we had net income of approximately $5.0 million, which primarily consisted of a noncash
gain of approximately $6.9 million resulting from changes in fair value of derivative warrant liabilities and income from investments
held in the Trust Account of approximately $24,000, partially offset by approximately $845,000 of offering costs associated with derivative
warrant liabilities, and $1.0 million of general and administrative expenses, including $100,000 of general and administrative expenses
to related parties.

Liquidity and Going Concern

As of December 31, 2022, we
had cash of $1.1 million. Until the consummation of the Public Offering, our only source of liquidity was an initial purchase of ordinary
shares and private placement units by the Sponsor and loans from our Sponsor.

Our liquidity needs prior
to the consummation of the Initial Public Offering had been satisfied through a payment of $25,000 from the Sponsor to cover certain expenses
on our behalf in exchange for the issuance of the Founder Shares (as defined below), a loan under a note agreement from our Sponsor of
approximately $149,000 (the “Note”), and the net proceeds from the consummation of the Private Placement not held in the Trust
Account. We fully repaid the Note on March 25, 2021. In addition, in order to finance transaction costs in connection with a Business
Combination, our Sponsor or an affiliate of our Sponsor, or certain of our officers and directors may, but are not obligated to, provide
us working capital loans. To date, there were no amounts outstanding under any working capital loans.

In connection with the Company’s
assessment of going concern considerations in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) Topic 205-40, “Presentation of Financial Statements - Going Concern,” management
has determined that the mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to
continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required
to liquidate after the Extended Date. The financial statements do not include any adjustment that might be necessary if the Company is
unable to continue as a going concern.

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Contractual Obligations

We do not have any long-term
debt, capital lease obligations, operating lease obligations or long-term liabilities, other than, an agreement to pay Sagara Group, LLC
a monthly fee of $10,000 for office space, utilities and secretarial, and administrative and support services. We began incurring these
fees on March 23, 2021 and will continue to incur these fees monthly until the earlier of the completion of the Business Combination and
our liquidation.

The underwriters are entitled
to a deferred fee of $0.35 per Unit, or $11,329,238 in the aggregate. The deferred fee will become payable to the underwriters from the
amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting
agreement.

Critical Accounting Policies

The preparation of financial
statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially
differ from those estimates. We have identified the following critical accounting policy:

Derivative Warrant Liabilities

We do not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including issued stock
purchase warrants and forward purchase agreements, to determine if such instruments are derivatives or contain features that qualify as
embedded derivatives, pursuant to FASB ASC Topic 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and
FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

The warrants issued in connection
with the Initial Public Offering and the Private Placement Warrants are recognized as derivative liabilities in accordance with ASC 815.
Accordingly, we recognize the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting
period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized
in the Company’s statements of operations. The initial estimated fair value of the warrants was measured using a Monte Carlo simulation.
The subsequent estimated fair value of the Public Warrants is based on the listed price in an active market for such warrants while the
fair value of the Private Placement Warrants continues to be measured using a Monte Carlo simulation.

Class A ordinary shares subject to possible
redemption

We account for our Class A
ordinary shares subject to possible redemption in accordance with the guidance in ASC 480. Class A ordinary shares subject to mandatory
redemption (if any) is classified as liability instruments and are measured at fair value. Conditionally redeemable Class A ordinary shares
(including Class ordinary shares that features redemption rights that are either within the control of the holder or subject to redemption
upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other
times, Class A ordinary shares are classified as shareholders’ equity. The Company’s Public Shares feature certain redemption
rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly,
as of December 31, 2022 and 2021, 32,369,251 Class A ordinary shares subject to possible redemption are presented at redemption value
as temporary equity, outside of the shareholders’ equity section of our balance sheet.

Effective with the closing
of the Public Offering (including sale of the Over-Allotment Units), we recognized the accretion from initial book value to redemption
amount, which resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.

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Net income per ordinary share

We have two classes of shares,
which are referred to as Class A ordinary shares and Class B ordinary shares. Income and losses are shared pro rata between the two classes
of shares. Net income per ordinary share is calculated by dividing the net income by the weighted average of ordinary shares outstanding
for the respective period.

The calculation of diluted
net income per ordinary shares does not consider the effect of the warrants issued in connection with the Public Offering (including sale
of the Over-Allotment Units) and the Private Placement to purchase an aggregate of 16,699,626 ordinary shares in the calculation of diluted
income per share, because their exercise is contingent upon future events and their inclusion would be anti-dilutive under the treasury
stock method. As a result, diluted net income per share is the same as basic net income per share for the year ended December 31, 2022
and for the period from January 8, 2021 (inception) through December 31, 2021. Accretion associated with the redeemable Class A ordinary
shares is excluded from net income per share as the redemption value approximates fair value.

Recent Accounting Standards

Management does not believe
that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our financial
statements.

Off-Balance Sheet Arrangements and Contractual
Obligations

As of December 31, 2022, we
did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or
contractual obligations.

JOBS Act

The JOBS Act contains provisions
that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth
company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date
for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result,
we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging
growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.

Additionally, we are in the
process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain
conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not
be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial
reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging
growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may
be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related
items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median
employee compensation. These exemptions will apply for a period of five years following the completion of our Initial Public Offering
or until we are no longer an “emerging growth company,” whichever is earlier.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

References to the “Company,”
“our,” “us” or “we” refer to BYTE Acquisition Corp. The following discussion and analysis of the Company’s
financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related
thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain
information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special
Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

53

Overview

We are a blank check company
incorporated on January 8, 2021 as a Cayman Islands exempted company for the purpose of effecting a merger, share exchange, asset acquisition,
share purchase, reorganization or similar business combination with one or more businesses or entities (the “Business Combination”),
that we have not yet identified. While we may pursue an initial business combination target in any business or industry, we intent to
focus our search for targets in the Israeli technology industry, including those engaged in cybersecurity, automotive technology, fintech,
enterprise software, cloud computing, semiconductors, medical technology, AI and robotics and that offer a differentiated technology platform
and products. Our sponsor is Byte Holdings LP, a Cayman Islands exempted limited partnership (our “Sponsor”).

Our registration statement for
our initial public offering was declared effective on March 17, 2021. On March 23, 2021, we consummated its Initial Public Offering of
30,000,000 units (the “Units” and, with respect to the Class A ordinary shares included in the Units being offered, the “Public
Shares”), at $10.00 per Unit, generating gross proceeds of $300.0 million, and incurring offering costs of approximately $17.2 million,
inclusive of approximately $10.5 million in deferred underwriting commissions. On April 7, 2021, the underwriter exercised the over-allotment
option in part and purchased an additional 2,369,251 Units (the “Over-Allotment Units”), generating additional gross proceeds
of $23,692,510 (such offering, including the exercise of the over-allotment, the “Initial Public Offering”).

Simultaneously with the closing
of the Initial Public Offering, we consummated the private placement (“Private Placement”) of 1,030,000 Units (the “Private
Placement Units”) at a price of $10.00 per Private Placement Unit, generating total gross proceeds of $10.3 million.

Upon the closing of the Initial
Public Offering, sale of the Over-Allotment Units, and the Private Placement, $323.7 million ($10.00 per Unit) of the net proceeds of
the sale of the Units in the Initial Public Offering and certain of proceeds of the Private Placement were placed in a trust account (“Trust
Account”) with Continental Stock Transfer & Trust Company acting as trustee and invested in United States “government
securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 185 days or less or in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S.
government treasury obligations, as determined by us, until the earlier of: (i) the completion of a Business Combination and (ii) the
distribution of the Trust Account to the shareholders.

If we are unable to complete
a Business Combination within 24 months from the closing of the Initial Public Offering, or March 23, 2023, we will (i) cease all operations
except for the purpose of winding up, (ii) as promptly as reasonably possible but no more than 10 business days thereafter, redeem 100%
of the outstanding Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account,
including interest earned (less taxes payable and up to $100,000 of interest to pay dissolution expenses), divided by the number of then
outstanding Public Shares, which redemption will completely extinguish public shareholders’ rights as shareholders (including the
right to receive further liquidation distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject
to the approval of the remaining shareholders and our board of directors, dissolve and liquidate, subject in each case to its obligations
under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law.

Results of Operations

Our entire activity since
inception through December 31, 2021 related to our formation, the preparation for the Initial Public Offering, and since the closing of
the Initial Public Offering, the search for a prospective initial Business Combination. We have neither engaged in any operations nor
generated any revenues to date. We will not generate any operating revenues until after completion of our initial Business Combination.
We will generate non-operating income in the form of interest income on cash and cash equivalents. We expect to incur increased expenses
as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence
expenses.

For the
period from January 8, 2021 (inception) through December 31, we had net income of approximately $5.0 million, which primarily consisted
of a noncash gain of approximately $6.9 million resulting from changes in fair value of derivative warrant liabilities and income from
investments held in the Trust Account of approximately $24,000, partially offset by approximately $845,000 of offering costs associated
with derivative warrant liabilities, and $1.0 million of general and administrative expenses, including $100,000 of general and administrative
expenses to related parties.

54

Liquidity and Going Concern

As of December 31, 2021, we
had cash of $1.7 million. Until the consummation of the Public Offering, our only source of liquidity was an initial purchase of ordinary
shares and private placement units by the Sponsor and loans from our Sponsor.

Our liquidity needs prior
to the consummation of the Initial Public Offering had been satisfied through a payment of $25,000 from the Sponsor to cover certain expenses
on our behalf in exchange for the issuance of the Founder Shares (as defined below), a loan under a note agreement from our Sponsor of
approximately $149,000 (the “Note”), and the net proceeds from the consummation of the Private Placement not held in the Trust
Account. We fully repaid the Note on March 25, 2021. In addition, in order to finance transaction costs in connection with a Business
Combination, our Sponsor or an affiliate of our Sponsor, or certain of our officers and directors may, but are not obligated to, provide
us working capital loans. To date, there were no amounts outstanding under any working capital loans.

In
connection with the Company’s assessment of going concern considerations in accordance with FASB Accounting Standards Update (“ASU”)
2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined
that the mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a
going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate
after March 23, 2023. The financial statements do not include any adjustment that might be necessary if the Company is unable to continue
as a going concern.

We continue to evaluate the
impact of the COVID-19 pandemic and has concluded that the specific impact is not readily determinable as of the date of the balance sheet.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Contractual Obligations

We do not have any long-term
debt, capital lease obligations, operating lease obligations or long-term liabilities, other than, an agreement to pay the Sponsor a monthly
fee of $10,000 for office space, utilities and secretarial, and administrative and support services. We began incurring these fees on
March 23, 2021 and will continue to incur these fees monthly until the earlier of the completion of the Business Combination and our liquidation.

The underwriters are entitled
to a deferred fee of $0.35 per Unit, or $11,329,238 in the aggregate. The deferred fee will become payable to the underwriters from the
amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting
agreement.

Critical Accounting Policies

The preparation of financial
statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially
differ from those estimates. We have identified the following critical accounting policy:

Derivative Warrant Liabilities

We do not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including issued stock
purchase warrants and forward purchase agreements, to determine if such instruments are derivatives or contain features that qualify as
embedded derivatives, pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and FASB ASC Topic 815, “Derivatives and
Hedging” (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is re-assessed at the end of each reporting period.

The warrants issued in connection
with the Initial Public Offering and the Private Placement Warrants are recognized as derivative liabilities in accordance with ASC 815.
Accordingly, we recognize the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting
period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized
in the Company’s statements of operations. The initial estimated fair value of the warrants was measured using a Monte Carlo simulation.
The subsequent estimated fair value of the Public Warrants is based on the listed price in an active market for such warrants while the
fair value of the Private Placement Warrants continues to be measured using a Monte Carlo simulation.

55

Class A ordinary shares
subject to possible redemption

We
account for our Class A ordinary shares subject to possible redemption in accordance with the guidance in ASC 480. Class A ordinary shares
subject to mandatory redemption (if any) is classified as liability instruments and are measured at fair value. Conditionally redeemable
Class A ordinary shares (including Class ordinary shares that features redemption rights that are either within the control of the holder
or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary
equity. At all other times, Class A ordinary shares are classified as shareholders’ equity. The Company’s Public Shares feature
certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain
future events. Accordingly, as of December 31, 2021, 32,369,251 Class A ordinary shares subject to possible redemption are presented at
redemption value as temporary equity, outside of the shareholders’ equity section of our balance sheet.

Effective
with the closing of the Public Offering (including sale of the Over-Allotment Units), we recognized the accretion from initial book value
to redemption amount, which resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.

Net income per ordinary
share

We
have two classes of shares, which are referred to as Class A ordinary shares and Class B ordinary shares. Income and losses are shared
pro rata between the two classes of shares. Net income per ordinary share is calculated by dividing the net income by the weighted average
of ordinary shares outstanding for the respective period.

The
calculation of diluted net income per ordinary shares does not consider the effect of the warrants issued in connection with the Public
Offering (including sale of the Over-Allotment Units) and the Private Placement to purchase an aggregate of 16,699,626 ordinary shares
in the calculation of diluted income per share, because their exercise is contingent upon future events and their inclusion would be anti-dilutive
under the treasury stock method. As a result, diluted net income per share is the same as basic net income per share for the period from
January 8, 2021 (inception) through December 31, 2021. Accretion associated with the redeemable Class A ordinary shares is excluded from
net income per share as the redemption value approximates fair value.

Recent Accounting Standards

Management does not believe
that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our
financial statements.

Off-Balance Sheet Arrangements and Contractual
Obligations

As of December 31, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments
or contractual obligations.

56

JOBS Act

The JOBS Act contains provisions
that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth
company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date
for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result,
we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging
growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.

Additionally, we are in the
process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain
conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not
be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial
reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging
growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may
be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related
items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median
employee compensation. These exemptions will apply for a period of five years following the completion of our Initial Public Offering
or until we are no longer an “emerging growth company,” whichever is earlier.