Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 and in our unaudited condensed consolidated financial statements and notes thereto, included elsewhere in this Quarterly Report on Form 10-Q (the "Quarterly Report").

This Quarterly Report includes forward-looking statements based on our current assumptions, expectations and projections about future events that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this Quarterly Report. For more information on these and other factors, see "Forward-Looking Statements" herein.

Overview

The Company and its wholly owned subsidiaries build and deploy integrated condition monitoring and early threat detection solutions that connect multiple sensor types through a unified edge-to-cloud software architecture. Our condition intelligence platform integrates multiple sensing modalities such as thermal, visual and acoustic, among others. Customers deploy the MSAI Connect platform to continuously monitor critical assets and identify early degradation patterns (such as elevated operating temperatures) across electrical, mechanical, and environmental systems. This allows teams to intervene early and convert potential failures into planned maintenance before downtime, safety incidents, or operational disruption occur.

We are pursuing expansion of our position as a Software as a Service ("SaaS") provider in predictive maintenance and believe there are significant opportunities to increase recurring revenue from our solutions. As deployment of multiple sensor modalities within our solutions becomes more pervasive, we have determined that disclosure of an aggregate active sensor count is no longer a meaningful operating metric because each sensor modality has different economic characteristics. For example, vibration sensors may be deployed in larger volumes at lower per-sensor subscription prices, whereas thermal sensors may be deployed in lower volumes at higher per-sensor subscription prices.

We focus on commercial environments where operational continuity is vital and automation intensity is high, including distribution and parcel logistics networks, data centers, and select manufacturing and industrial facilities. We believe our solutions offer a compelling combination of performance, scalability, and cost efficiency relative to traditional inspection and monitoring approaches. Our digital, multi-sensor software platform is designed to support the transition from intermittent, manual asset inspections towards continuous intelligent condition monitoring. By streaming and analyzing radiometric thermal data in combination with other deployed sensor inputs, our MSAI Connect software platform can surface early anomaly signals that may not be visible or detected during periodic inspections. Our system architecture is intentionally modular and extensible, allowing for the integration of additional sensing modalities and analytics capabilities over time. While our current commercial deployments are centered primarily on thermal-based monitoring enhanced by software-driven analytics and expert review, we believe MSAI Connect's multi-sensor foundation positions us to expand into broader predictive and prescriptive use cases.

Through collaboration with several blue-chip multinational customers during development and deployment, we have validated high-value, mission-critical use cases across our target markets: distribution and logistics, manufacturing and data centers. These engagements have informed our product evolution and reinforced our belief that integrated, AI-enabled multi-sensor monitoring represents a structural shift in how industrial reliability and asset protection are managed.

In the distribution and logistics market, we believe our solutions deliver meaningful operational value by enabling enhanced predictive maintenance capabilities that help minimize unplanned downtime, lower labor and maintenance costs, and improve facility throughput and operational continuity. During the first quarter of 2026, we completed initial deployments at Manchester Airport and a global direct-to-consumer food solutions provider, further validating the applicability of our solutions across complex, mission-critical operations. In addition, we continue to expand our relationship with a large global distribution customer, which has advised that additional projects focused on monitoring rooftop solar infrastructure and distribution facilities have been approved, with installations expected to occur throughout fiscal year 2026.

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In the data center market, our focus is on the critical infrastructure systems that support data center reliability, uptime, and operational resilience. Through our MSAI Connect solutions, we help customers identify early signs of electrical and cooling system degradation before conventional alarms are triggered across applications such as chillers, cooling towers, automatic transfer switches, backup generators, power panels, and transformers. During the first quarter of 2026, we successfully deployed two pilot projects within the data center sector. Initial customer feedback has been encouraging, and we are actively engaged in discussions to expand these deployments and pursue additional opportunities across other data center facilities.

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In the manufacturing market, our go-to-market strategy is centered on delivering early threat detection and operational reliability solutions designed to enhance safety, reduce operational risk, and improve asset visibility. We continue to work closely with two of the "Big 3" automakers on our ongoing pilot programs focused on lithium-ion battery pack monitoring and the deployment of dual-vision hardware sensors. In parallel, we remain actively engaged with these customers in identifying additional high-value applications for our solutions across broader manufacturing and production environments.

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Recent Developments

Reverse Stock Split

On April 13, 2026, we effected a 1-for-40 reverse stock split (the "Reverse Stock Split") of our common stock. As a result of the Reverse Stock Split, our outstanding common stock was reduced from 80,491,720 shares to 2,012,293 shares, and proportionate adjustments were made to the number of shares underlying our outstanding equity awards and equity incentive plans, including corresponding adjustments to exercise prices and performance thresholds, as applicable. The total number of authorized shares, the par value and other terms of our common stock were not affected by the Reverse Stock Split.

Warrants

Pursuant to the terms of the Warrant Agreement, dated October 18, 2021, by and between the Company and Continental Stock Transfer & Trust Company, and as a result of the Reverse Stock Split, the exercise price of the Company's public warrants to purchase 8,625,000 shares of common stock at an exercise price of $11.50 per share (the "Public Warrants"), and private placement warrants to purchase up to 506,250 shares of common stock at an exercise price of $11.50 per share (the "Private Placement Warrants" and together with the Public Warrants, the "SPAC Warrants"), each issued in connection with our initial public offering, was adjusted from $11.50 to $460.00. Additionally, the number of shares of common stock issuable upon exercise of the Public Warrants and Private Placement Warrants was proportionally reduced to 215,625 shares and 12,657 shares, respectively. Except as provided herein, all other terms and provisions of the SPAC Warrants remain in full force and effect.

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Pursuant to the terms of the Subscription Agreement, dated December 1, 2023, by and among the Company and certain investors signatory thereto, and as a result of the Reverse Stock Split, the exercise price of the Company's warrants to purchase 340,250 shares of common stock at an exercise price of $11.50 per share (the "Financing Warrants"), issued in connection with our business combination, was adjusted from $11.50 to $460.00. Additionally, the number of shares of common stock issuable upon exercise of the Financing Warrants was proportionally reduced to 8,507 shares. Except as provided herein, all other terms and provisions of the Financing Warrants remain in full force and effect.

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On October 24, 2025, we entered into that certain Securities Purchase Agreement (the "2025 Purchase Agreement") with 325 Capital, LLC ("325 Capital") and certain other accredited investors signatory thereto (collectively with 325 Capital, the "Investors"), pursuant to which we sold to the investors warrants to purchase up to 68,459,652 shares of common stock (the "2025 Warrants"). Pursuant to the terms of 2025 Warrants, and as a result of the Reverse Stock Split, the exercise price of the 2025 Warrants was adjusted from $0.409 to $5.98 per share. The number of shares of common stock issuable upon exercise of the 2025 Warrants was proportionately increased to 4,682,273.85 shares. Except as provided herein, all other terms and provisions of the 2025 Warrants remain in full force and effect.

2026 Sales Agreement

On March 13, 2026, we entered into an at market issuance sales agreement (the "2026 Sales Agreement") with Roth Capital Partners, LLC and H.C. Wainwright & Co., LLC as sales agents or principals (the "Agents"), under which we may offer and sell shares

of our common stock having an aggregate market value of up to $60 million from time to time through the Agents. We intend to use the net proceeds from sales of common stock under the 2026 Sales Agreement, if any, for working capital and general corporate purposes.

Results of Operations

Three months ended March 31, 2026 compared to three months ended March 31, 2025

The following table presents summary results of operations for the periods indicated in thousands:

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Revenue: Revenue for the three months ended March 31, 2026 was $1.6 million, compared to $1.2 million for the three months ended March 31, 2025. Revenue streams from each of our products and services are summarized below for the three months ended March 31, 2026 and 2025.

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The increase in revenue was primarily attributable to a $0.4 million or 169% increase in software revenue from sales of MSAI Connect, our condition intelligence platform, and a $0.2 million or 21% increase from sensor sales connected with new deployments of our platform and standalone hardware sales. These increases in revenue were offset by a decrease in services revenue of $0.1 million or 84%, primarily related to the discontinuation of inspection and training services in August 2025.

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Cost of Goods Sold: Cost of goods sold for the three months ended March 31, 2026 was $0.7 million, compared to $0.5 million for the three months ended March 31, 2025. The increase in cost of goods sold was attributable to an increase in the quantity of sensor hardware sold as well as a change in product mix.

Selling, General and Administrative Expense: Selling, general and administrative expense for the three months ended March 31, 2026 was $3.0 million, compared to $4.1 million for the three months ended March 31, 2025. The decrease in selling, general and administrative expense was primarily driven by a $0.7 million reduction in professional fees and $0.2 million reduction in payroll expenses compared to the prior year period.

Share-Based Compensation Expense: Share-based compensation expense for the three months ended March 31, 2026 was $0.2 million, compared to $0.9 million for the three months ended March 31, 2025. The decrease in share-based compensation expense was primarily attributable to restricted stock units granted during the first quarter of 2025, which included a provision for immediate vesting of 25% of the total award, resulting in higher expense recognized in the prior-year period.

Depreciation: Depreciation expense was $0.4 million for the three months ended March 31, 2026, compared to $0.3 million for the three months ended March 31, 2025. The increase in depreciation expense was primarily driven by additions to property, plant, and equipment, predominately software associated with our development of MSAI Connect, partially offset by lower depreciation expense related to machinery, equipment, and demo assets due to disposals and sales completed during fiscal year 2025.

Interest expense (income), net: Interest income was $0.2 million for the three months ended March 31, 2026, compared to insignificant interest income for the three months ended March 31, 2025. The increase in interest income was primarily due to higher average cash balances invested in interest-bearing accounts.

Other expense (income), net: Other income, net was insignificant for the three months ended March 31, 2026, compared to $0.2 million for the three months ended March 31,2025. The decrease in other income was primarily due to the resolution of the ELOC make-whole obligation, as notified by B. Riley on January 8, 2025 (as discussed below), which resulted in a one-time benefit recorded in the prior-year period.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA are supplemental non-GAAP financial measures used by management. We define EBITDA as net income (loss) before (i) interest expense (net interest income), (ii) depreciation and (iii) taxes. We define "Adjusted EBITDA" as EBITDA before share-based compensation expenses, change in fair value of convertible notes and warrant liabilities, inventory impairment, loss on financing transaction, other expense (income) and loss (gain) on disposal of assets, as each are applicable to the periods presented.

We believe EBITDA and Adjusted EBITDA are useful performance measures because they facilitate comparison of our results of operations from period to period without regard to our financing methods or capital structure or other items that impact comparability of financial results from period to period such as fluctuations in interest expense or effective tax rates, levels of depreciation, non-cash charges such as share based compensation expenses or unusual items that are not considered an indicator of ongoing performance of our operations. In addition, we believe that such non-GAAP financial measures are used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance. EBITDA and Adjusted EBITDA should not be considered as alternatives to, or more meaningful than, net income (loss) or any other measure as determined in accordance with GAAP. Our computations of EBITDA and Adjusted EBITDA may not be comparable to EBITDA or Adjusted EBITDA of other companies. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.

EBITDA and Adjusted EBITDA, when viewed in a reconciliation to respective GAAP measures, provide an additional way of viewing the Company's results of operations and factors and trends affecting the Company's business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP. The following tables present a reconciliation of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) (unaudited) for each of the periods indicated, in thousands:

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Liquidity and Capital Resources

We incurred losses for the three months ended March 31, 2026 and 2025. We have historically funded our operations with internally generated cash flows, equity financings, debt, convertible notes, and promissory notes with shareholders and related parties. As of March 31, 2026, we had $22.6 million of cash and cash equivalents. We expect that our current sources of liquidity, together with our projection of cash flows from operating activities, will provide us with adequate liquidity for at least the next 12 months.

We may require additional capital in order to execute on our business plan and may require capital to fund our operations or to respond to technological advancements, competitive dynamics, technologies, customer demands, business opportunities, challenges, acquisitions, or unforeseen circumstances, and we may determine to raise capital through equity or debt financings or enter into credit facilities for other reasons. In order to maintain our anticipated growth trajectory and to further business relationships with current or potential customers or partners, or for other reasons, we may issue equity or equity-linked securities to such current or potential customers or partners. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all, as these plans are subject to market conditions and are not within our control. There is no assurance that we will be successful in implementing our plans. If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, or if we issue equity or equity-linked securities to current or potential customers to further business relationships, our existing stockholders could experience significant dilution. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited and our business could be materially and adversely affected.

Equity Line of Credit ("ELOC")

On April 16, 2024, we entered into that certain common stock purchase agreement (the "Purchase Agreement") with B. Riley Principal Capital II, LLC ("B. Riley"). Pursuant to the Purchase Agreement, we had the right, but not the obligation, to sell to B. Riley up to $25 million worth of common stock (the "Purchase Shares") over the term of the Purchase Agreement. In accordance with the Purchase Agreement, on April 16, 2024, we issued 4,296 shares of our common stock to B. Riley as consideration for its commitment to purchase the Purchase Shares under the Purchase Agreement (the "Commitment Shares"). Under the terms of the Purchase Agreement, if the aggregate amount of cash proceeds, if any, received by B. Riley from the resale of the Commitment Shares was less than $500, then, upon notice by B. Riley, the Company was required to pay the difference between $500 and the aggregate cash proceeds received by B. Riley from its resale. On January 8, 2025, B. Riley notified the Company that it had sold the Commitment Shares, which resolved the liability. Accordingly, $0.2 million was recorded in Other expense (income), net in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2025.

During the three months ended March 31, 2026, the Company did not utilize the B. Riley ELOC and terminated the Purchase Agreement effective February 2, 2026. During the three months ended March 31, 2025, the Company utilized the ELOC to sell 44,793 shares of common stock for cash proceeds totaling $4.7 million.

At the Market Sales Agreements

On March 13, 2026, the Company entered into the 2026 Sales Agreement with the Agents, under which the Company may offer and sell shares of the Company's common stock having an aggregate market value of up to $60 million from time to time through the Agents. The Agents are entitled to compensation at a fixed commission rate based on the gross sales price of shares sold pursuant to the 2026 Sales Agreement. During the three months ended March 31, 2026, the Company did not sell any shares under the 2026 Sales Agreement.

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On March 28, 2025, the Company entered into an at market issuance sales agreement (the "2025 Sales Agreement") with B. Riley Securities, Inc. ("B. Riley Securities") as sales agent or principal, pursuant to which the Company could offer and sell shares of its common stock, having an aggregate offering price of up to $8.6 million from time to time through B. Riley Securities. B. Riley Securities was entitled to compensation at a fixed commission rate based on the gross sales price of shares sold pursuant to the 2025 Sales Agreement. During the three months ended March 31, 2026 and 2025, the Company did not sell any shares under the 2025 Sales Agreement. The Company terminated the 2025 Sales Agreement effective February 2, 2026.

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2025 Private Placement

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As previously discussed, on October 24, 2025, the Company entered into the 2025 Purchase Agreement with the Investors, pursuant to which it agreed to sell to the Investors (i) 855,745 shares of common stock at a purchase price of $16.36 per share and (ii) the 2025 Warrants (collectively, the "2025 Private Placement"), with an exercise price of $5.98 per share, for an aggregate purchase price of $14 million before deducting placement agent fees and offering expenses. 325 Capital and its affiliates beneficially own more than 5.0% of the outstanding common stock. In addition, Daniel M. Friedberg, who is a Managing Member of 325 Capital, serves on the Company's board of directors.

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The 2025 Purchase Agreement and the 2025 Warrants provide that each Investor's beneficial ownership of common stock, including after taking into account the full exercise of such Investor's 2025 Warrant, shall in no event exceed 49.5% of the issued and outstanding common stock (the "Maximum Ownership Limitation"). In the event that an Investor's 2025 Warrant is not exercisable for shares of common stock due to the beneficial ownership of such Investor exceeding the Maximum Ownership Limitation, the applicable 2025 Warrant will be exercisable for shares of the Company's Series A Convertible Preferred Stock, par value $0.0001 per share (the "Preferred Stock"), that are convertible into an equivalent number of shares of common stock for which the 2025 Warrant is exercisable. The 2025 Warrants will expire seven years from the date of issuance.

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At the initial closing of the Private Placement on October 30, 2025, the Company issued to the Investors 174,272 shares of common stock and 2025 Warrants to purchase up to 953,543.13 shares of common stock (as adjusted for the Reverse Stock Split), for gross proceeds of $2.85 million before deducting placement agent fees and offering expenses.

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On December 23, 2025, the final closing occurred and the Company issued 681,474 shares of common stock and 2025 Warrants to purchase up to 3,728,730.72 shares of common stock (as adjusted for the Reverse Stock Split) to the Investors for gross proceeds of $11.15 million before deducting placement agent fees and offering expenses.

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2025 Registered Direct Offering

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On November 4, 2025, the Company entered into a common stock purchase agreement with a single institutional investor, pursuant to which the Company agreed to issue and sell (i) 114,875 shares (the "2025 Registered Direct Shares") of the Company's common stock and (ii) pre-funded warrants (the "2025 Pre-Funded Warrants") to purchase up to 152,500 shares of common stock (the "2025 Pre-Funded Warrant Shares") in a registered direct offering (the "2025 Registered Direct Offering"). The 2025 Registered Direct Shares, 2025 Pre-Funded Warrants and 2025 Pre-Funded Warrant Shares are registered pursuant to an effective shelf registration statement on Form S-3 (File No. 333-284437), and a base prospectus and prospectus supplement relating to the 2025 Registered Direct Offering, in each case filed with the SEC. The offering price was $54.00 per share of common stock and $53.9999 per Pre-Funded Warrant, which is the price of each share of common stock sold in the 2025 Registered Direct Offering, minus the $0.0001 exercise price per 2025 Pre-Funded Warrant.

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The 2025 Registered Direct Offering closed on November 5, 2025, and resulted in gross proceeds to the Company of approximately $14.4 million, before deducting advisory fees and offering expenses payable by the Company. Following the delivery of exercise notices to the Company on November 5, 2025 and November 6, 2025, the 2025 Pre-Funded Warrants were exercised in full.

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Cash Flows

Three months ended March 31, 2026 compared to three months ended March 31, 2025

The following table summarizes our cash flows for the periods indicated, in thousands:

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Operating Activities

Net cash used in operating activities was $1.7 million for the three months ended March 31, 2026, a decrease of $1.5 million compared to $3.2 million for the three months ended March 31, 2025. The decrease in net cash used in operating activities was primarily driven by a lower net loss during the current period, as well as changes in working capital, including the timing of customer receipts.

Investment Activities

Net cash used in investing activities was $0.1 million for the three months ended March 31, 2026, a decrease of $0.3 million as compared to $0.4 million of net cash used in investing activities for the three months ended March 31, 2025. The decrease is primarily related to a decrease in cash paid for capital expenditures.

Financing Activities

Net cash used in financing activities was insignificant for the three months ended March 31, 2026, compared to $4.0 million of net cash provided by financing activities for the three months ended March 31, 2025. The decrease was primarily attributable to $4.7 million of proceeds from the issuance of common stock during the three months ended March 31, 2025, with no comparable financing activity in the current period.

Contractual Obligations

As of March 31, 2026, we did not have any material contractual obligations.

Off-Balance Sheet Arrangements

As of March 31, 2026, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in our 2025 Annual Report. There have been no significant and material changes in our Critical Accounting Policies and Estimates since the 2025 Annual Report.

Recently Issued Accounting Standards

See Note 2 of the notes to our annual consolidated financial statements in the 2025 Annual Report for our assessment of recently issued and adopted accounting standards.

Emerging Growth Company and Smaller Reporting Company Status

We are an emerging growth company under the Jumpstart Our Business Act of 2012 (the "JOBS Act"). The JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such a time as those standards apply to private companies.

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), (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 or (v) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies. However, we have elected to opt out of this extended exemption period discussed (v) and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. We may take advantage of these exemptions until December 31, 2026, or until we are no longer an emerging growth company, whichever is earlier. We will cease to be an emerging growth company prior to the end of such five-year period if certain earlier events occur, including if we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.235 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period.

Additionally, we are a "smaller reporting company" as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

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