Mynd(US:MYND)2025-03-26 10:47PART I ITEM 3. KEY INFORMATION This section outlines the company's principal risks, including market dependence, supply chain vulnerabilities, internal control weaknesses, and potential conflicts of interest arising from its controlled company status Risk Factors This section outlines the principal risks facing the company, categorized into business and industry, intellectual property, and ownership risks - The company generates a substantial portion of its revenue from large format Interactive Flat Panel Display (IFPD) products, making it vulnerable to demand shifts or market saturation in developed markets like the U.S. and U.K.3233 - Business operations are significantly dependent on manufacturing in China and Mexico. The imposition of new or increased tariffs on goods from these countries could materially harm the business by increasing costs, disrupting the supply chain, and creating a competitive disadvantage.5762 - The company is subject to a National Security Agreement (NSA) with the U.S. Government (CFIUS) that restricts data sharing with its controlling shareholder, NetDragon. Failure to comply could result in significant civil penalties.8182 - Several material weaknesses in internal control over financial reporting have been identified, which could impair the ability to report financial information accurately and on time, potentially leading to loss of investor confidence or regulatory action.105106107 - As a "controlled company" with NetDragon owning approximately 74% of shares, NetDragon can control director appointments and the outcome of major corporate transactions, which may create conflicts of interest with other shareholders.133134 ITEM 4. INFORMATION ON THE COMPANY This section details the company's history, including its transformation into Mynd.ai, Inc. after a merger and divestitures, and provides a business overview of its core IFPD and software solutions through Promethean History and Development of the Company This section details the company's historical development and key corporate transactions - On December 13, 2023, the company consummated a merger with eLMTree Inc. (NetDragon's overseas education business), changed its name to Mynd.ai, Inc., and divested its entire education business in the PRC. This transaction resulted in NetDragon becoming the holder of approximately 74% of the company's shares.147148 - The merger was accounted for as a reverse acquisition, with eLMTree deemed the acquirer for accounting purposes, meaning eLMTree's financial information is presented for all historical periods.148 - On October 2, 2024, the company completed the sale of its early childcare learning business in Singapore (Global Eduhub Holding Limited) for $20 million in cash, reflecting a strategic decision to focus on hardware and software solutions for the education, business, and public sectors.149 Business Overview This section provides an overview of the company's core business operations, products, and market position - The company's core business, through its subsidiary Promethean, is providing digital communication and collaboration platforms, centered around its award-winning interactive flat-panel displays (IFPDs) like the ActivPanel.150151 - As of December 31, 2024, Promethean held a 22.1% share of the IFPD market in the U.S. and a 12.9% share of the global market (excluding China).154 - The company utilizes a robust channel-based sales model with over 140 sales professionals managing more than 1,700 reseller channel partners and distributors across 125 countries.169 - The Edmodoworld software platform was shut down on March 31, 2024, and its parent entity, Edmodo LLC, was dissolved effective June 3, 2024, signaling a discontinuation of that business line.167 Organizational Structure This section describes the company's corporate structure and its subsidiaries - The report includes a diagram illustrating the company's corporate structure and its subsidiaries.185 Property, Plant and Equipment This section details the company's tangible fixed assets and property leases - The company does not own any material tangible fixed assets. It leases properties for its operations, including its headquarters in Seattle, Washington, and offices in Alpharetta, Georgia.187 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, highlighting a significant FY2024 revenue decline due to reduced education technology demand, and details operating results, liquidity, and critical accounting estimates Operating Results This section reviews the company's financial performance, including revenue, gross profit, and net income trends - A downward trend in education technology customer demand was observed in 2024, believed to be caused by budget uncertainty after the conclusion of COVID-related government relief programs. This trend materially impacted revenue and operating results.192 Key Financial Performance (2022-2024) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Revenue | $267.4M | $411.8M | $584.7M | | Gross Profit | $66.2M | $100.5M | $141.1M | | Gross Margin | 24.8% | 24.4% | 24.1% | | Net (Loss) Income | ($95.8M) | ($39.4M) | $20.5M | | Adjusted EBITDA | ($24.1M) | ($11.2M) | $9.7M | - Revenue decreased by 35.1% in 2024 compared to 2023, primarily due to reduced customer demand and budget uncertainties in the education technology market. This followed a 29.6% decrease in 2023 from 2022 as the market normalized post-pandemic.218219 - Cost of revenue decreased 35.4% in 2024, driven by lower sales volume and savings from lower component pricing, reduced freight rates, and transitioning final assembly for U.S. inventory to Mexico.220 - A significant income tax expense of $68.7 million was recorded in 2024, compared to a benefit of $9.7 million in 2023. This change was primarily driven by the recording of a full valuation allowance against U.S. and U.K. deferred tax assets due to uncertainty about their future realizability.236 Liquidity and Capital Resources This section discusses the company's cash flow, available liquidity, and capital management strategies Cash Flow Summary (Continuing Operations) | Cash Flow Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($0.9M) | $0.7M | $6.8M | | Net cash provided by (used in) investing activities | $10.3M | $13.6M | ($15.8M) | | Net cash (used in) provided by financing activities | ($22.6M) | $44.4M | $11.3M | - As of December 31, 2024, the company had $75.3 million in cash and cash equivalents.255 - Key sources of liquidity include a secured revolving line of credit with Bank of America with a capacity of $50.0 million, of which $11.0 million was outstanding and $8.6 million was available as of Dec 31, 2024. Additionally, a $65.0 million convertible promissory note was issued in December 2023.252253 - Management believes that despite the recent market downturn and potential for continued operating losses, its cash and cash equivalents are sufficient to fund operating and capital needs for at least the next 12 months.255257 Critical Accounting Estimates This section outlines the significant judgments and assumptions used in preparing the financial statements - Due to the downward trend in education technology demand, management performed quantitative impairment tests for goodwill and indefinite-lived intangible assets as of December 31, 2024. The analyses concluded that the fair values exceeded the carrying amounts, and therefore no impairment charges were recorded.273275276 - Management recorded a full valuation allowance against its U.S. and U.K. deferred tax assets as of December 31, 2024. This was due to uncertainty regarding their realizability, driven by cumulative pre-tax losses and the recent decline in sales.282659660 - The fair value of the embedded derivative in the company's convertible note is a critical estimate, calculated using a Monte Carlo simulation model with significant assumptions related to ADS price, volatility, and credit risk.280633 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section covers the company's leadership, including director and executive compensation, board structure, employee headcount changes due to divestiture, and the recovery of erroneously awarded executive compensation Compensation This section details the compensation of the company's directors and executive officers - For the fiscal year ended December 31, 2024, the aggregate cash compensation paid to directors and executive officers was approximately $8.3 million.299 - In January 2024, the Board approved the Mynd.ai Equity Incentive Plan, initially authorizing 54.8 million ordinary shares for issuance. An automatic annual increase added another 27.7 million shares on January 1, 2025.302303 Board Practices This section describes the composition and practices of the company's board of directors - The board of directors consists of seven members, five of whom are determined to be independent. The board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance.305306307 Employees This section provides information on the company's workforce and employee headcount Employee Headcount (Year-End) | Year | Total Employees | | :--- | :--- | | 2024 | 505 | | 2023 | 1,365 | | 2022 | 1,143 | - The significant decline in employee numbers from 2023 to 2024 is primarily due to the disposition of the early childhood education business in Singapore in October 2024.313 Disclosure of registrant's action to recover erroneously awarded compensation This section details the company's actions to recover compensation awarded in error - Following a restatement of financial statements for FY2022 and FY2023, the company determined it had erroneously awarded $193,959 in incentive-based compensation to seven current and former executive officers for FY2023.317 - As of December 31, 2024, the full amount remained outstanding, but the company has since recouped substantially all of it by cancelling 201,655 RSUs previously awarded to the executives.320 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's ownership structure, with NetDragon as the controlling shareholder, and outlines significant related party transactions including a convertible note and various commercial agreements Major Shareholders This section identifies the company's principal shareholders and their ownership percentages Major Shareholders (as of March 15, 2025) | Shareholder | Ownership Percentage | | :--- | :--- | | NetDragon Websoft Holdings Limited | 74.1% | | Ascendent Rainbow (Cayman) Limited | 11.9% | | Nurture Education Cayman Limited | 11.0% | Related Party Transactions This section describes transactions between the company and its related parties - The company issued a $65.0 million senior secured convertible note to Nurture Education (Cayman) Limited, an affiliate of shareholder ACP. The note bears 5.00% cash interest and 5.00% PIK interest per annum and matures in 2028. The conversion price was reset to $1.214 on December 13, 2024.331332334 - The company has commercial agreements with Elernity Limited, a NetDragon subsidiary, for technology development services (incurring $5.4 million in fees in 2024) and product distribution rights (receiving $462,000 in 2024).339340 - As a result of the dissolution of Edmodo LLC, historical net payable balances of $2.4 million owed by Edmodo to NetDragon subsidiaries were forgiven in 2024.342 ITEM 8. FINANCIAL INFORMATION This section refers to the consolidated financial statements in Item 18, noting no significant changes since year-end and implicitly covering legal proceedings ITEM 10. ADDITIONAL INFORMATION This section provides supplementary information, primarily focusing on taxation, including Cayman Islands tax policies and U.S. federal income tax considerations for ADS holders, particularly regarding PFIC rules Taxation This section outlines the tax implications for the company and its U.S. holders - The company is incorporated in the Cayman Islands, which currently does not levy taxes on corporate profits, income, gains, or appreciation, nor does it impose withholding tax on dividends.359 - The report discusses the potential for the company to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which would subject U.S. Holders to special, often adverse, tax rules. The determination is fact-intensive and made annually.371373 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section identifies primary market risks including interest rate fluctuations, foreign currency exchange rates affecting 33% of 2024 revenue, and potential tariffs on imports from China and Mexico - The company's exposure to interest rate risk is primarily from its variable-rate revolving line of credit, but this is partially mitigated as its cash holdings earn interest indexed to similar rates.400 - In FY2024, approximately 33% of total revenue was denominated in foreign currencies, primarily the Pound sterling, Euro, and Chinese Yuan. A hypothetical 10% change in these currencies would have impacted revenue by approximately $8.8 million.403 - The company is actively monitoring trade policies and potential new/additional tariffs on imports from Mexico and China, which could materially affect its results of operations and financial condition.406 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section details the fees and charges payable by holders of American Depositary Shares (ADSs) to the depositary, covering issuance, cancellation, and distributions, noting no depositary reimbursements in 2024 ADS Holder Fees | Service | Fee per ADS | | :--- | :--- | | Issuance / Cancellation | Up to US$0.05 | | Cash Distribution | Up to US$0.05 | | Stock Distribution | Up to US$0.05 | PART II ITEM 15. CONTROLS AND PROCEDURES This section reports that management concluded disclosure controls and internal control over financial reporting were ineffective as of December 31, 2024, due to material weaknesses, and outlines ongoing remediation efforts - Management concluded that as of December 31, 2024, the company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting.417 - Key material weaknesses identified include: an ineffective control environment lacking sufficient accounting resources and proper segregation of duties; an inadequate risk assessment process; and ineffective IT general controls over program changes, user access, and computer operations.419420423 - The company is implementing a remediation plan that includes hiring more accounting personnel, designing new procedures for risk assessment and non-routine transactions, and enhancing IT governance and controls.424429 ITEM 16. [RESERVED] This section covers corporate governance, including audit committee details, principal accountant fees, NYSE listing standard exemptions for foreign private issuers, and the company's cybersecurity risk management and governance Principal Accountant Fees and Services This section details the fees paid to the company's principal independent registered public accounting firm Fees Paid to Deloitte & Touche LLP (in thousands) | Fee Category | 2024 | 2023 | | :--- | :--- | :--- | | Audit fees | $2,005 | $1,917 | | All other fees | $20 | $0 | | Total | $2,025 | $1,917 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers This section reports on the company's repurchase of its own equity securities - In December 2024, the company purchased 151,923 of its own ADSs at an average price of $2.19 per ADS as part of a publicly announced repurchase program. As of the end of the period, approximately $9.7 million remained available for future repurchases under the plan.437 Corporate Governance This section describes the company's corporate governance practices and compliance with listing standards - As a foreign private issuer incorporated in the Cayman Islands, the company follows certain home country governance practices instead of NYSE rules. This includes not being required to hold an annual shareholder meeting and not requiring its Nominating Committee to be comprised solely of independent directors.438440 Cybersecurity This section outlines the company's cybersecurity risk management and governance framework - The company has a cybersecurity risk management program with oversight from the Board of Directors and the Audit Committee. Management, including employees with relevant expertise, is responsible for assessing and managing cybersecurity risks.451453454 - To date, the company has not identified any cybersecurity threats that have materially affected, or are reasonably anticipated to materially affect, its operations or financial condition.450 PART III ITEM 18. FINANCIAL STATEMENTS This section presents the audited consolidated financial statements for 2022-2024, including the auditor's report highlighting goodwill impairment as a critical audit matter, and notes on acquisitions, dispositions, and a financial restatement Report of Independent Registered Public Accounting Firm This section contains the independent auditor's opinion on the consolidated financial statements - The independent auditor, Deloitte & Touche LLP, issued an opinion stating that the financial statements present fairly, in all material respects, the financial position and results of operations of the company.460 - The audit identified one Critical Audit Matter (CAM): the impairment evaluation of goodwill and indefinite-lived intangible assets. This was considered a CAM due to the significant and subjective management estimates required for forecasting revenues, growth rates, and discount rates to determine fair value.465467 Consolidated Financial Statements and Notes This section includes the detailed consolidated financial statements and accompanying notes - The financial statements have been revised to correct an immaterial error from prior periods (2019-2024) related to the understatement of certain liabilities and cost of revenue. While immaterial to prior periods, correcting it in the current period would have been material, necessitating the revision of comparative financial statements.496497 - On October 2, 2024, the company sold its GEH Singapore segment for $20 million in cash, resulting in a pre-tax gain on disposition of $9.3 million. This business is now presented as a discontinued operation for all periods shown.491592 Revenue by Geography (in thousands) | Region | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | United States | $179,810 | $292,584 | $417,476 | | Rest of World | $87,571 | $119,173 | $167,208 | | Total | $267,381 | $411,757 | $584,684 | - One customer accounted for 16% of revenue in 2024 ($43.2M), 20% in 2023 ($84.3M), and 24% in 2022 ($139.3M), indicating a significant customer concentration.667