What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 121 added, 53 removed, 144 unchanged (55% of the section changed)

34 unchanged sentences

Liability as of

March 31, 2024

Liability as of

Earnout liability

Senior Secured Convertible Promissory Notes

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

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

Warrant liability (Public Warrants)

Warrant liability (Private Warrants)

Total liabilities measured at fair value

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

Other loss related to instruments recorded at fair value during the six months ended June 30, 2024

$ (12,424,851 )

Other loss related to instruments recorded at fair value during the six months ended June 30, 2023

Private Placement and Public Warrants

At the merger closing, the Company assumed 515,000 private placement warrants and 16,184,612 public warrants.

As of March 31, 2024, there were 515,000 private placement warrants and 16,159,112 public warrants outstanding.

The warrants are exerciseable at $11.50 per share.

At the merger closing, we assumed 515,000 private placement warrants and 16,184,612 public warrants.

On June 3, 2024, we permanently reduced the exercise price of such warrants from $11.50 per share to an exercise price of $7.80 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.

As of June 30, 2024, there were 515,000 private placement warrants and 16,159,012 public warrants outstanding.

See Note 12– Private Placement and Public Warrants for more information.

34 unchanged sentences

Results of Operations

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

The following table sets forth key components of our results of operations during the three months ended June 30, 2024 and 2023.

(dollars in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Cost of net revenues

2 unchanged sentences

Total operating expenses

Operating income (loss)

Other income (expense):

Gain from change in fair value of warrants

Gain from change in fair value of earnout liability

Gain from change in fair value of convertible debt

Interest expense

Other expense

Total other income (expense), net

Income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net Revenues — Net revenues for the three months ended June 30, 2024 increased $3,631,000 to $6,401,000 as compared to $2,770,000 for the three months ended June 30, 2023, as a result of increased product sales.

We received purchase orders from various federal government agency customers totaling over $13 million from which we partially shipped in the three months ended June 30, 2024.

Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support.

For the three months ended June 30, 2024, cost of sales increased $798,000 to $1,895,000 as compared to $1,097,000 for the three months ended June 30, 2023.

The increase was due to higher product sales.

Gross profit increased due to product mix, with reduced equipment purchases and increased Outpost AI sales during the three months ended June 30, 2024.

Research and Development Expenses — Research and development expenses for the three months ended June 30, 2024 increased $38,000 to $703,000 as compared to $665,000 for the three months ended June 30, 2023.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the three months ended June 30, 2024 decreased $1,265,000 to $2,827,000 as compared to $4,092,000 for the three months ended June 30, 2023.

The decrease was due to (i) increased insurance costs of $142,000;

(ii) increased professional fees of $291,000, primarily related to the merger and the Nasdaq listing;

(iii) issuance of common stock for services of $199,000;

(iii) increased other operating --expenses of $114,000;

and offset by (iv) decreased stock based compensation of $2,011,000.

The stock based compensation expense during the three months ended June 30, 2023 included warrants to purchase common stock issued to Victor Huang and Derek Xu on May 8, 2023 for 765,000 shares to each of the founders valued at $2,136,115.

Other Income Expense — Other income for the three months ended June 30, 2024 was $17,486,000 as compared to other expense of $19,000 for the three months ended June 30, 2023.

Other expense for the three months ended June 30, 2024 consisted of (i) gain from change in fair value of warrant liability of $1,542,000;

(ii) gain from change in fair value of earnout liability of $14,877,000;

(iii) gain from change in fair value of convertible debt of $1,527,000;

and offset by (iv) interest expense $421,000;

and (v) other expense of $39,000.

Other expense for the three months ended June 30, 2023 related primarily to interest and other expense of $19,000.

Net Income — Net income for the three months ended June 30, 2024 was $18,462,000 as compared to net loss of $3,103,000 for the three months ended June 30, 2023.

The net income primarily related to noncash items of $16,894,000.

Noncash items included (i) stock based compensation of $262,000;

(ii) net amortization of operating lease right of use asset of $71,000;

(iii) issuance of common stock for services of $198,000;

(iv) noncash interest expense of $521,000;

(v) gain from change in warrant liability of $1,542,000;

(vi) gain from change in earnout liability of $14,877,000;

and (vii) gain from change in fair value of convertible note of $1,527,000.

The net loss for the three months ended June 30, 2023 included noncash expenses of $2,775,000 primarily related to $2,136,115 stock compensation expense for warrants issued to founders.

The following table sets forth key components of our results of operations during the six months ended June 30, 2024 and 2023.

(dollars in thousands)

Six Months Ended June 30,

Cost of net revenues

Research and development expenses

Selling, general and administrative expenses

Total operating expenses

Operating loss

9 unchanged sentences

Income tax benefit (expense)

Net Revenues — Revenues for the three months ended March 31, 2024 increased $7,636,000 to $10,575,000 as compared to $2,939,000 for the three months ended March 31, 2023, as a result of increased product sales.

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

Net Revenues — Net revenues for the six months ended June 30, 2024 increased $11,267,000 to $16,976,000 as compared to $5,709,000 to for the six months ended June 30, 2023, as a result of increased product sales.

We received purchase orders from various federal government agency customers totaling over $16 million from which we shipped in the six months ended June 30, 2024.

Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support.

For the three months ended March 31, 2024, cost of sales increased $5,812,000 to $7,947,000 as compared to $2,135,000 for the three months ended March 31, 2023.

The increase was due to higher product sales and product mix with high equipment purchases during the three months ended March 31, 2024.

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

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the three months ended March 31, 2024 increased $1,503,000 to $3,335,000 as compared to $1,832,000 for the three months ended March 31, 2023.

For the six months ended June 30, 2024, cost of sales increased $6,611,000 to $9,842,000 as compared to $3,231,000 for the six months ended June 30, 2023.

The increase was due to higher product sales and product mix with high equipment purchases during the six months ended June 30, 2024.

Research and Development Expenses — Research and development expenses for the six months ended June 30, 2024 increased $59,000 to $1,398,000 as compared to $1,339,000 for the six months ended June 30, 2023.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the six months ended June 30, 2024 increased $237,000 to $6,162,000 as compared to $5,925,000 for the six months ended June 30, 2023.

The increase was due to (i) increased insurance costs of $433,000;

(ii) increased professional fees of $768,000, primarily related to the merger and the Nasdaq listing;

and (iii) increased other operating --expenses of $630,000.

Other Expense — Other expense for the three months ended March 31, 2024 was $30,562,000 as compared to other expense of $10,000 for the three months ended March 31, 2023.

Other expense for the three months ended March 31, 2024 consisted of (i) loss from change in fair value of warrant liability of $6,847,000;

(iii) issuance of common stock for services of $199,000;

(iv) increased subscriptions of $164,000;

(v) increased other operating expenses of $77,000;

and offset by (vi) decreased stock based compensation of $1,878,000.

The stock based compensation during the six months ended June 30, 2023 included warrants to purchase common stock issued to Victor Huang and Derek Xu on May 8, 2023 for 765,000 shares to each of the founders valued at $2,136,115.

Other Expense — Other expense for the six months ended June 30, 2024 was $13,076,000 as compared to other expense of $29,000 for the six months ended June 30, 2023.

Other expense for the six months ended June 30, 2024 consisted of (i) loss from change in fair value of warrant liability of $5,305,000;

(ii) loss from change in fair value of earnout liability of $6,608,000;

1 unchanged sentence

(iv) loss on note conversion of $159,000;

and (iv) noncash interest of $32,000.

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

Net Loss — Net loss for the three months ended March 31, 2024 was $31,964,000 as compared to net loss of $1,712,000 for the three months ended March 31, 2023.

The net loss primarily related to noncash charges of $30,881,000.

Noncash charges include (i) depreciation of $2,000;

(v) interest expense of $453,000;

and (vi) other interest of $39,000.

Other expense for the six months ended June 30, 2023 related primarily to interest of $19,000 and other expense of $10,000.

Net Loss — Net loss for the six months ended June 30, 2024 was $13,502,000 as compared to net loss of $4,815,000 for the six months ended June 30, 2023.

The net loss primarily related to noncash items of $13,987,000.

Noncash items included (i) depreciation of $2,000;

(ii) stock based compensation of $531,000;

(iii) net amortization of operating lease right of use asset of $151,000;

(iv) loss from change in warrant liability of $6,847,000;

(v) loss from change in earnout liability of $21,485,000;

(vi) loss from change in fair value of convertible note of $2,039,000;

and (vii) loss on note conversions of $159,000.

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

(iv) issuance of common stock for services of $198,000;

(v) noncash interest expense of $521,000;

(vi) loss from change in warrant liability of $5,305,000;

(vii) loss from change in earnout liability of $6,608,000;

(viii) loss from change in fair value of convertible note of $512,000;

and (ix) loss on note conversions of $159,000.

The net loss for the six months ended June 30, 2023 included noncash expenses of $2,775,000 primarily related to $2,136,115 stock compensation expense for warrants issued to founders.

Liquidity and Capital Resources as of June 30, 2024 and December 31, 2023

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis.

Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

We formally evaluated our liquidity and cash position most recently in May 2024 when preparing our March 31, 2024 unaudited financial statements.

We formally evaluated our liquidity and cash position most recently in August 2024 when preparing our June 30, 2024 unaudited financial statements.

During this process we concluded, based upon existing assets and liabilities, our order backlog and projections, plus the ability to borrow in short term loans from our founder, that we would be able to operate at least for the next twelve months.

We have received purchase orders from various federal government agency customers totaling over $13 million from which we shipped and started receiving cash in the first quarter of 2024.

As of March 31, 2024, we had cash of approximately $1,726,000.

We have incurred losses from operations the past few years and had an accumulated deficit of $49,441,000 as of March 31, 2024.

The accumulated deficit includes noncash charges of $30,881,253 and $19,626,884 for the three months ended March 31, 2024 and the year ended December 31, 2023.

We also had at March 31, 2024 an adjusted working capital deficit of approximately $2,000,000.

The adjusted net working capital deficit excludes current deferred revenue totaling $3,742,000 and convertible debt totaling $4,205,000 (which we expect to be converted to equity).

We have primarily funded its operations from operating cash, proceeds from debt borrowings, advances from founders, and proceeds from the merger.

We have received purchase orders from various federal government agency customers totaling over $16 million from which we shipped and started receiving cash in the first and second quarters of 2024.

As of June 30, 2024, we had cash of approximately $227,000 and accounts receivable of approximately $3,440,000 which we expect to collect in the near term after quarter end.

We have incurred losses from operations over the past few years and had an accumulated deficit of $30,979,000 as of June 30, 2024.

We also had at June 30, 2024 a working capital deficit of approximately $6,712,000.

The net working capital deficit includes a couple of items that are expected to require limited cash outlays in the future, including the current deferred revenue totaling $3,791,970 and convertible debt totaling $2,675,919, which we expect to be converted to equity.

We have primarily funded our operations from operating cash, proceeds from debt borrowings and advances from founders.

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 was $1,695,000.

Net cash used in operating activities for the six months ended June 30, 2024 was $4,147,000.

This amount was primarily related to (i) net loss of $13,502,000;

and (ii) net working capital reductions of $4,632,000;

offset by (iii) noncash charges of $30,881,000.

Noncash charges include (iv) depreciation of $2,000;

offset by (iii) noncash items of $13,987,000.

Noncash items included (iv) depreciation of $2,000;

(v) stock based compensation of $531,000;

(vi) net amortization of operating lease right of use asset of $151,000;

(vii) loss from change in warrant liability of $6,847,000;

(viii) loss from change in earnout liability of $21,485,000;

(ix) loss from change in fair value of convertible note of $2,039,000;

(x) loss on note conversions of $159,000.

Net cash used in operating activities for the three months ended March 31, 2023 was $990,000.

(vii) issuance of common stock for services of $198,000;

(viii) noncash interest expense of $521,000;

(ix) loss from change in warrant liability of $5,305,000;

(x) loss from change in earnout liability of $6,608,000;

(xi) loss from change in fair value of convertible note of $512,000;

and (xii) loss on note conversions of $159,000.

Net cash used in operating activities for the six months ended June 30, 2023 was $737,000.

This amount was primarily related to (i) a net loss of $4,815,000;

1 unchanged sentence

and (iii) noncash charges of $2,775,000.

Noncash charges include (iii) depreciation of $3,000;

(iv) stock based compensation of $137,000;

and (v) net amortization of operating lease right of use asset of $206,000.

Noncash charges included (iv) depreciation of $7,000;

(v) stock based compensation- stock options of $274,000;

(vi) stock based compensation- warrants of $2,136,000;

and (vii) net amortization of operating lease right of use asset of $358,000.

Financing Activities

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

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

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

Net cash provided by financing activities for the six months ended June 30, 2024 was $1,240,000 and consisted of (i) proceeds from warrant exercise of $293,000;

(ii) advances from founders of $800,000;

and (iii) proceeds from stock option exercises of $147,000.

Net cash provided by financing activities for the six months ended June 30, 2023 was $2,660,000 and consisted of (i) proceeds from convertible promissory note of $1,985,000;

(ii) advances from founders of $1,100,000;

and offset by (iii) repayment of small business loan and line of credit of $425,000.

Our contractual cash obligations as of June 30, 2024 (excluding debt financing arrangements below) are summarized in the table below:

Contractual Cash Obligations

6 unchanged sentences

We expect the convertible debt to be converted to equity.

On June 22, 2024, we entered into an Extension Agreement related to the Platinum convertible note.

The Extension Agreement extended the due date of the Platinum convertible note from June 22, 2024 to June 22, 2025.

On November 2, 2023, we issued senior secured convertible promissory notes for $600,000 to two private investors.

2 unchanged sentences

Huang has committed to providing additional temporary funding if it is necessary.

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

We believe that our cash on hand, funding from the completion of the merger, 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.

7 unchanged sentences

The Company leases 3,621 square feet and the net monthly payment is $6,488.

The lease expires on July 29, 2024.

The lease expires on August 29, 2024.

Off-Balance Sheet Arrangements

8 unchanged sentences

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

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

The critical accounting estimates and policies during the six months ended June 30, 2024 have not materially changed to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis