Item 1. Financial Statements
ITEM 1.
FINANCIAL STATEMENTS
MINIM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30,
2024
(Unaudited)
December 31,
2023
ASSETS
Current assets
Cash and cash equivalents
$
191,724
$
709,322
Accounts receivable, net of allowance of doubtful accounts of $ 0 and $ 312,983 as of September 30, 2024 and December 31, 2023, respectively
-
701,377
Inventories, net
-
9,952,647
Prepaid expenses and other current assets
24,107
35,768
Total current assets
215,831
11,399,114
Equipment, net
189,054
432,505
Operating lease right-of-use assets, net
-
22,512
Intangible assets, net
-
33,247
Other assets
28,311
472,587
Total assets
$
433,196
$
12,359,965
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable
$
307,781
$
11,143,693
Current maturities of operating lease liabilities
-
22,512
Accrued expenses
684,269
1,077,843
Total current liabilities
992,050
12,244,048
Total liabilities
992,050
12,244,048
Commitments and Contingencies (Note 7)
Stockholders’ equity (deficit)
Preferred Stock, authorized: 10,000,000 shares at $ 0.001 par value; 2,000,000 shares issued and outstanding
1,358,573
-
Common Stock, authorized: 60,000,000 shares at $ 0.01 par value; issued and outstanding: 3,557,581 shares at September 30, 2024 and 2,632,809 shares at December 31, 2023 respectively
488,583
479,335
Additional paid-in capital
94,434,702
92,105,360
Accumulated deficit
( 96,840,712
)
( 92,468,778
)
Total stockholders’ equity (deficit)
( 558,854
)
115,917
Total liabilities and stockholders’ equity (deficit)
$
433,196
$
12,359,965
See accompanying notes to the unaudited condensed consolidated financial statements.
1
MINIM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Net sales
$
-
$
6,696,187
$
639,893
$
24,642,728
Cost of goods sold
-
9,694,096
432,634
24,545,534
Gross profit
-
( 2,997,909
)
207,259
97,194
Operating expenses:
Selling and marketing
-
2,073,636
66,171
9,386,157
General and administrative
625,067
963,108
2,210,097
3,460,092
Research and development
-
687,076
113,294
3,358,276
Vendor liability forgiveness, net of asset transfers
-
-
2,200,929
-
Total operating expenses
625,067
3,723,820
4,590,491
16,204,525
Operating loss
( 625,067
)
( 6,721,729
)
( 4,383,232
)
( 16,107,331
)
Other income (expense):
Interest income (expense), net
-
( 99,084
)
82
( 356,644
)
Total other income (expense)
-
( 99,084
)
82
( 356,644
)
Loss before income taxes
( 625,067
)
( 6,820,813
)
( 4,383,150
)
( 16,463,974
)
Income tax expense (benefit)
-
( 525
)
( 11,216
)
24,451
Net loss
$
( 625,067
)
$
( 6,820,287
)
$
( 4,371,934
)
$
( 16,488,425
)
Net loss per share:
Basic and diluted
$
( 0.22
)
$
( 3.61
)
$
( 1.55
)
$
( 8.74
)
Basic and diluted weighted average common and common equivalent shares
2,866,594
1,890,933
2,815,907
1,886,465
See accompanying notes to unaudited condensed consolidated financial statements.
2
MINIM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (deficit)
(Unaudited)
For the Nine months ended September 30, 2024
Preferred Stock
Common Stock
Additional
Paid In
Accumulated
Shares
Amount
Shares
Amount
Capital
Deficit
Total
Balance at December 31, 2023
-
$
-
2,632,809
$
479,335
$
92,105,360
$
( 92,468,778
)
$
115,917
Net loss
-
-
-
-
-
( 3,258,955
)
( 3,258,955
)
Preferred stock issuance
2,000,000
1,358,573
-
-
-
-
1,358,573
Issuance of warrants
-
-
-
-
1,441,427
-
1,441,427
Stock-based compensation
-
-
176,880
1,769
424,512
-
426,281
Balance at March 31, 2024
2,000,000
$
1,358,573
2,809,689
$
481,104
$
93,971,299
$
( 95,727,733
)
$
83,243
Net loss
-
-
-
-
-
( 487,912
)
( 487,912
)
Balance at June 30, 2024
2,000,000
$
1,358,573
2,809,689
$
481,104
$
93,971,299
$
( 96,215,645
)
$
( 404,669
)
Net loss
-
-
-
-
-
( 625,067
)
( 625,067
)
Stock-based compensation
-
-
747,892
7,479
463,403
-
470,882
Balance at September 30, 2024
2,000,000
$
1,358,573
3,557,581
$
488,583
$
94,434,702
$
( 96,840,712
)
$
( 558,854
)
For the Nine months ended September 30, 2023
Common Stock
Additional
Paid In
Accumulated
Shares
Amount
Capital
Deficit
Total
Balance at December 31, 2022
1,877,970
$
469,492
$
90,710,030
$
( 74,834,854
)
$
16,344,668
Net loss
-
-
-
( 4,070,457
)
( 4,070,457
)
Common stock issued for vested restricted units
9,565
2,391
( 2,391
)
-
-
Stock-based compensation
-
-
123,500
-
123,501
Balance at March 31, 2023
1,887,535
$
471,883
$
90,831,139
$
( 78,905,311
)
$
12,397,711
Net loss
-
-
-
( 5,597,681
)
( 5,597,681
)
Common stock issued for vested restricted stock units
739
7
( 7
)
-
-
Stock-based compensation
-
-
101,589
-
101,589
Balance at June 30, 2023
1,888,274
$
471,890
$
90,932,721
$
( 84,502,992
)
$
6,901,619
Net loss
-
-
-
( 6,820,287
)
( 6,820,287
)
Common stock issued for vested restricted stock units
10,191
102
( 102
)
-
-
Stock-based compensation
-
-
54,305
-
54,305
Balance at September 30, 2023
1,898,466
$
471,992
$
90,986,924
$
( 91,323,279
)
$
135,637
See accompanying notes to unaudited condensed consolidated financial statements.
3
MINIM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2024
2023
Cash flows used in operating activities:
Net loss
$
( 4,371,934
)
$
( 16,488,425
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
290,130
440,546
Amortization of right-of-use assets
22,512
119,465
Amortization of debt issuance costs
-
29,815
Stock based compensation
431,681
279,394
Provision for accounts receivable allowances
( 29,741
)
( 138,331
)
Vendor liability forgiveness, net of asset transfers
2,200,929
-
Changes in operating assets and liabilities:
Accounts receivable
731,118
( 102,495
)
Inventories
404,299
14,922,185
Prepaid expenses and other current assets
11,660
230,993
Other assets
27,318
26,803
Accounts payable
( 3,084,966
)
7,365,878
Accrued expenses
( 393,574
)
( 3,041,742
)
Deferred revenue
-
184,940
Operating lease liabilities
( 22,512
)
( 119,465
)
Net cash provided by (used in) operating activities
( 3,783,080
)
3,709,561
Cash flows from investing activities:
Purchases of equipment
-
( 162,270
)
Certification costs capitalized
-
( 219,595
)
Net cash used in investing activities
-
( 381,865
)
Cash flows from financing activities:
Net payment on the bank credit line
-
( 3,891,682
)
Proceeds from preferred stock issuance
2,800,000
-
Proceeds from common stock issuance
465,482
-
Net cash provided by (used in) financing activities
3,265,482
( 3,891,682
)
Net decrease in cash and cash equivalents
( 517,598
)
( 563,986
)
Cash and cash equivalents - Beginning
709,322
1,030,110
Cash and cash equivalents - Ending
$
191,724
$
466,124
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
-
$
235,006
Income taxes
$
11,125
$
24,451
See accompanying notes to the unaudited condensed consolidated financial statements.
4
MINIM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Minim, Inc. and its wholly owned subsidiaries, MME Sub 1 LLC, Cadence Connectivity, Inc., MTRLC LLC, and Minim Asia Private Limited, are herein collectively referred to as “Minim” or the “Company”. The Company support and services intelligent networking products that reliably and securely connect homes and offices around the world that it previously sold. We were the exclusive global license holder to the Motorola brand for home networking hardware until 2023. The Company supports and services products including cable modems, cable modem/routers, mobile broadband modems, wireless routers, Multimedia over Coax (“MoCA”) adapters and mesh home networking devices. Our AI-driven cloud software platform and applications make network management and security simple for home and business users, as well as the service providers that assist them— leading to higher customer satisfaction and decreased support burden.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods.
On April 17, 2023, the Company effected a 25:1 reverse stock split for each share of common stock issued and outstanding. All shares and associated amounts have been retroactively restated to reflect the stock split.
Liquidity
The Company’s operations have historically been financed through the issuance of common stock and borrowings. Since inception, the Company has incurred significant losses and negative cash flows from operations. During the nine months ended September 30, 2024, the Company incurred a net loss of $4.4 ( 4,371,934 ) million, and used cash from operations of $3.8 ( 3,783,080 ) million, which was offset by $3.3 3,265,482 million in cash provided from financing activities. As of September 30, 2024, the Company had an accumulated deficit of $96.8 ( 96,840,712 ) million and cash and cash equivalents of $0.2 191,724 million. The Company will continue to monitor its costs in relation to its sales and adjust its cost structure accordingly. Management of the Company believes it will not have sufficient resources to continue as a going concern through at least one year from the issuance of these financial statements.
Merger Agreement with e2 Companies, LLC
On March 12, 2024, the “Company”, and its wholly owned subsidiary, MME Sub 1 LLC, a Florida limited liability company (“Merger Sub”), formed in March 2024, entered into an Agreement and Plan of Merger (“Merger Agreement”) with e2Companies LLC, a Florida limited liability company (“e2Companies”). The Merger Agreement did not close by the end date, and as such, by the terms of the agreement,
in July 2024 it terminated of its own accord.
5
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023. The Company’s significant accounting policies did not change during the nine months ended September 30, 2024.
Recently Issued Accounting Standards
In 2023, the FASB issued ASU 2023 - 09 – Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures (“ASU 2023-09”). This update standardizes categories for the effective tax rate reconciliation, requires disaggregation of income taxes and additional income tax-related disclosures. This update is required to be effective for the Company for fiscal periods beginning after December 15, 2025. The Company is evaluating the effect that ASU 2023-09 will have on its financial statements and disclosures.
The FASB also issued ASU 2023 - 07: Segment Reporting Topic 280 - Improvements to Reportable Segment Disclosures. This update requires expanded annual and interim disclosures for significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. This update will be effective for fiscal years beginning after December 15, 2024, and is to be applied retrospectively to all periods presented in the financial statements. Early adoption is permitted. The Company is evaluating the effect that ASU 2023 - 07 will have on its financial statements and disclosures and believes it will not have a material impact on the Company’s consolidated financial statements.
On March 21, 2024, the FASB issued Accounting Standards Update (ASU) 2024 - 01, Compensation—Stock Compensation (Topic 718 ): Scope Application of Profits Interest and Similar Awards, which provides illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of ASC Topic 718, Compensation — Stock Compensation . This update will be effective for fiscal years beginning after December 15, 2024. Early adoption is permitted and is treated either retrospectively or prospectively. The Company believes it will not have a material impact on the Company’s consolidated financial statements.
(3) REVENUE AND OTHER CONTRACTS WITH CUSTOMERS
Revenue recognized for each distinct performance obligation as control is transferred to the customer. Revenue attributable to hardware products bundled with Software-as-a-Service (“SaaS”) offerings are recognized at the time control of the product transfers to the customer. The transaction price allocated to the SaaS offering is recognized ratably beginning when the customer is expected to activate their account and over a three-year period that the Company has estimated based on the expected replacement of the hardware.
6
Transaction Price Allocated to the Remaining Performance Obligations
The remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods for which customer purchase orders have been accepted, that are scheduled or in the process of being scheduled for shipment, and that are not yet invoiced.
Contract costs
The Company recognizes the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year. The Company has determined that certain sales commissions meet the requirements to be capitalized, and the Company amortizes these costs on a consistent basis with the pattern of transfer of the goods and services in the contract. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets on our condensed consolidated balance sheets.
The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. These costs include sales commissions on SaaS contracts with a contract period of one year or less as sales commissions on contract renewals are commensurate with those paid on the initial contract.
Contract Balances
The Company records accounts receivable when it has an unconditional right to the consideration. The Company did no t have contract liabilities at September 30, 2024 and December 31, 2023.
Disaggregation of Revenue
The following table sets forth our revenues by distribution channel:
Schedule of disaggregation of revenue by distribution channel
Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Retailers
$
-
$
6,274,558
$
638,904
$
23,122,589
Distributors
-
-
-
171,043
Other
-
421,629
989
1,349,096
$
-
$
6,696,187
$
639,893
$
24,642,728
The following table sets forth our revenues by product:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Cable modems & gateways
$
-
$
6,448,977
$
638,804
$
23,910,809
Other networking products
-
243,528
1,089
568,304
SaaS
-
3,682
-
163,615
$
-
$
6,696,187
$
639,893
$
24,642,728
7
(4) BALANCE SHEET COMPONENTS
Inventories
Inventories, net consists of the following:
Schedule of inventories
September 30,
2024
December 31,
2023
Materials
$
-
$
210,318
Work in process
-
1,640,347
Finished goods
-
8,101,982
Total
$
-
$
9,952,647
The Company did no t have consigned inventory held by our customers or in-transit inventory at September 30, 2024 and December 31, 2023. The Company reviews inventory for obsolete and slow-moving products each quarter and makes provisions based on its estimate of the probability that the material will not be consumed or that it will be sold below cost. The inventory reserves were $ 0 million and $ 1.7 million as of September 30, 2024 and December 31, 2023, respectively.
Accrued expenses
Accrued expenses consist of the following:
Schedule of accrued expenses
September 30,
2024
December 31,
2023
Payroll & related benefits
$
304,500
$
-
Professional fees
48,555
229,950
Board of director fees
37,500
-
Sales allowances
26,905
697,884
Sales and use tax
150,009
150,009
Franchise tax fees
116,800
-
Total accrued other expenses
$
684,269
$
1,077,843
(5) BANK CREDIT LINES AND GOVERNMENT LOANS
Bank Credit Line
On March 12, 2021, the Company terminated its Financing Agreement and entered into a loan and security agreement with Silicon Valley Bank (the “SVB Loan Agreement”). On November 1, 2021, the Company entered into the first amendment to the SVB Loan Agreement (the “First Amendment”). The SVB Loan Agreement, as amended, provides for a revolving facility up to a principal amount of $ 25.0 million. The borrowing base equals the sum of (a) 85.0 percent of eligible customer receivables, plus (b) the least of (i) 60 percent of the value of eligible inventory (valued at cost), (ii) 85% of the net orderly liquidation value of inventory, and (iii) $6.2 million in each, as determined by SVB from the Company’s most recent borrowing base statement; provided that SVB has the right to decrease the foregoing percentages in its good faith business judgment to mitigate the impact of events, conditions, contingencies, or risks which may adversely affect the collateral or its value.
The SVB Loan Agreement is secured by substantially all of the Company’s assets but excludes the Company’s intellectual property. Loans under the credit facility bear interest at a rate per annum equal to (i) at all times when a streamline period is in effect, the greater of (a) one-half of one percent (0.50%) above the Prime Rate or (b) three and three-quarters of one percent (3.75%) and (ii) at all times when a streamline period is not effect, the greater of (a) one percent (1.0%) above the Prime Rate and (b) four and one-quarter of one percent (4.25%).
8
On December 12, 2022, the Company entered into its second Amendment to the SVB Loan Agreement (the “Second Amendment”). The Second Amendment (i) reduced the aggregate amount available under the revolving credit line from $ 25 million to $ 10 million, (ii) extends maturity to January 15, 2024, and (iii) provides a waiver for an existing default under the SVB Loan Agreement by virtue of the Company having entered into a Bridge Loan and Security Agreement dated as of November 23, 2022 by and among Borrower and Slingshot Capital, LLC, under which Borrower incurred certain Indebtedness and granted a Lien to Slingshot Capital.
The Company incurred $ 143 thousand in origination costs in connection with entering into the SVB Loan Agreement. These origination costs were recorded as a debt discount and are being expensed over the remaining term of the facility. Amortization of debt issuance costs was $ 0 thousand and $ 8 thousand for the three months ended September 30, 2024 and 2023, respectively. Amortization of debt issuance costs was $ 0 thousand and $ 29 thousand for the nine months ended September 30, 2024 and 2023, respectively.
On October 18, 2023, the Company paid in full the outstanding balance and immediately terminated the SVB Loan Agreement. As of September 30, 2024 and December 31, 2023, the Company had $ 0 outstanding under the SVB Loan Agreement.
Covenants
The SVB Loan Agreement included a minimum interest expense of $ 20 thousand per month. The First Amendment required the Company to maintain certain levels of minimum adjusted EBITDA, which were tested on the last day of each calendar quarter and measured for the trailing 3-month period ending on the last day of each quarter. The Second Amendment removed the minimum EBITDA covenants.
In addition, pursuant to the SVB Loan Agreement, the Company cannot pay any dividends without the prior written consent of SVB.
Bridge Loan
On November 30, 2022 (the “Effective Date”), the Company and Slingshot Capital, LLC (“Slingshot Capital”) entered into a Bridge Loan Agreement (the “Bridge Loan Agreement”) pursuant to which Slingshot Capital agreed to make available a bridge loan in the principal amount up of up to $ 1,500,000 . In conjunction with the Bridge Loan Agreement, the Company executed a bridge term note (the “Bridge Term Note”) in favor of Slingshot Capital. The Company has drawn down $ 1,000,000 under the Bridge Loan Agreement. Subject to Slingshot Capital’s sole discretion, the other $ 500,000 may be drawn by the Company.
Principal amounts borrowed under the Bridge Loan Agreement bear interest of 8.00 % per annum for the period from the Effective Date until February 28, 2023. Unpaid principal after February 28, 2023 bear an interest of 14.00 % per annum until paid in full. In the event of default, all outstanding principal and interest shall bear interest at an annual rate of 18 % .
In connection with the Bridge Loan Agreement, the Company, Slingshot Capital, and Silicon Valley Bank (the “Senior Lender”) executed a subordination agreement (the “Subordination Agreement”) on November 30, 2022. The Loan Agreement is subordinated to the outstanding indebtedness and obligations under the Company’s senior credit facility. Subject to the Senior Lender’s written consent, the Company shall grant Slingshot Capital a second-priority security interest in all of the Company’s collateral, which shall be subordinated to any and all security interests granted to the Senior Lender and at all times shall be limited to the same collateral granted to the Senior Lender under the senior credit facility.
Principal and interest are not due and payable until the maturity date, which is January 15, 2024, unless the Company’s senior credit facility with the Senior Lender is paid in full in cash on an earlier date.
The Company reimbursed Slingshot Capital $ 20,000 for its reasonable and documented expenses and fees related to the negotiations, documentation, and execution of the Bridge Loan Agreement, Subordination Agreement, and Bridge Term Note.
9
On December 6, 2023, the Company and Slingshot Capital entered into a Debt Conversion Agreement (“Conversion Agreement”) pursuant to which the Company agreed to issue 734,343 shares of the Company’s common stock (based on $ 1.533 per share) (the “Shares”) in exchange for the cancellation of a total principal amount of $ 1,000,000 (“Principal Amount”) outstanding under the Bridge Loan Agreement and Bridge Term Note (collectively, the “Loan Agreements”), with Slingshot Capital, plus $ 125,778 in accrued and unpaid interest on such Principal Amount as of December 6, 2023. The price per share used in the exchanged was determined by the weighted average price per share and trade volume on September 13, 2023 and November 28, 2023.
Slingshot Capital is owned by the Company’s former Chairperson of the Board and a former Board of Director, Jeremy Hitchcock and Elizabeth Hitchcock, respectively.
(6) Leases
The Company had entered into agreements
to lease certain office space as well as its former warehouses and distribution centers under operating leases. In May 2020, the
Company signed a two-year lease agreement for 3,218 square feet of office space at 275 Turnpike Executive Park in Canton, MA. On December 1,
2021, the Company executed an amendment to extend the lease from June 2022 to May 2024 with monthly payments of approximately
$5 thousand. As of September 30, 2024, the Company’s leased office space has terminated and was not renewed.
The Company recognizes lease expense
for these leases on a straight-line basis over the lease term. Right-of-use (“ROU”) assets and lease liabilities are recorded
on the balance sheet for all leases, except leases with an initial term of 12 months or less.
The components of lease costs were as follows:
Schedule of components of lease costs
Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Operating lease costs
$
-
$
40,576
$
22,512
$
82,369
Short-term lease costs
-
8,900
14,050
26,700
Total lease costs
$
-
$
49,476
$
36,562
$
109,069
The weighted-average remaining lease term and discount rate were as follows:
Schedule of weighted average remaining lease term and discount rate
Period Ended
September 30,
2024
2023
Operating leases:
Weighted average remaining lease term (years)
0.0
0.5
Weighted average discount rate
0.0
%
3.8
%
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
Schedule of supplemental cash flow information related to operating leases
Nine Months Ended
September 30,
2024
2023
Operating cash flow information:
Amounts included in measurement of lease liabilities
$
22,512
$
123,399
Non-cash activities:
ROU asset obtained in exchange for lease liability
$
-
$
-
As of September 30, 2024, the Company does not have future lease payments after its office lease expired in May 2024.
10
( 7) COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Company was a party to a license agreement with Motorola Mobility LLC pursuant to which the Company has an exclusive license to use certain trademarks owned by Motorola Trademark Holdings, LLC for the manufacture, sale and marketing of consumer cable modem products, consumer routers, WiFi range extenders, MoCa adapters, cellular sensors, home powerline network adapters, and access points worldwide through a wide range of authorized sales channels. The license agreement had a term ending December 31, 2025 prior to its cancellation in 2023.
In connection with the license agreement, the Company had committed to reserve a certain percentage of wholesale prices for use in advertising, merchandising and promotion of the related products. Additionally, the Company was required to make quarterly royalty payments equal to a certain percentage of the preceding quarter’s net sales with minimum annual royalty payments. Following the Company’s agreement with Motorola Mobility LLC on January 22, 2024, the Company’s quarterly royalty payments, in addition to current and future obligations, were satisfied in exchange for certain assets of the Company.
Royalty expense under the License Agreement amounted to $ 0 million and $ 1.7 million for the three months ended September 30, 2024 and 2023, respectively, and $ 0 million and $ 5.1 million for the nine months ended September 30, 2024 and 2023, respectively. The royalty expense is reported in selling and marketing expense on the accompanying condensed consolidated statements of operations.
On January 22, 2024, the Company, entered into a Letter Agreement re Product Purchase (the “Letter Agreement”) and a Debt Settlement Agreement (the “Settlement Agreement,” and the Letter Agreement, the “Agreements”) with Motorola Mobility, LLC (“Motorola”). Pursuant to the Letter Agreement, the Company (A) initially transferred a portion of its inventory to Motorola and (B) agreed to transfer the reminder of such inventory upon receipt of certain funding in order to satisfy liabilities owed to Motorola, while agreeing to continue to provide certain customer and technical support. Pursuant to the Settlement Agreement, the Company agreed (i) to pay Motorola a settlement amount of $1,167,071 and (ii) to transfer additional funds as collected from the Company’s customers in an amount up to $263,752. The Company believes that the Agreements, together with arrangements it has finalized with other major vendors, will allow the Company to streamline its operations while reducing its current liabilities.
(b) Vendor Obligation Releases
In its efforts to manage its liquidity and cash-flow position, the Company negotiated and executed liability release agreements with certain vendors in Q4 2023 who comprised $ 5.0 million of outstanding accounts payable as of December 31, 2023. In aggregate, the executed release agreements resulted in a reduction of outstanding accounts payable obligations by $3.6 million from $5.0 million to $1.4 million. The executed release agreements became effective and are contingent upon payment of the $ 1.4 million negotiated amounts received during the period of Q1 2024. In addition, the Company agreed to pay certain vendors an additional $ 0.4 million contingent upon successful collection of customer receivables. After the collection of customer receivables, the contingent amount was amended to $ 0.3 million during the period ended September 30, 2024. In July 2024, the Company paid the contingent amount of $ 0.3 million to its vendors.
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(c) Contingencies
The Company is party to various lawsuits and administrative proceedings arising in the ordinary course of business. The Company evaluates such lawsuits and proceedings on a case-by-case basis, and its policy is to vigorously contest any such claims which it believes are without merit.
The Company reviews the status of its legal proceedings and records a provision for a liability when it is considered probable that both a liability has been incurred and the amount of the loss can be reasonably estimated. This review is updated periodically as additional information becomes available. If both criteria are not met, the Company reassesses whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, the Company discloses the estimate of the amount of the loss or range of losses - that the amount is not material, or that an estimate of the loss cannot be made. At September 30, 2024, the Company is not currently a party to any legal proceedings that, if determined adversely to the Company, in management’s opinion, are currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole. The Company expenses its legal fees as incurred.
In the ordinary course of its business, the Company is subject to lawsuits, arbitrations, claims, and other legal proceedings in connection with their business. Some of the legal actions include claims for substantial or unspecified compensatory and/or punitive damages. A substantial adverse judgment or other unfavorable resolution of these matters could have a material adverse effect on the Company’s financial condition, results of operations, and cash flows. Management believes that the Company has adequate legal defenses with respect to the legal proceedings to which it is a defendant or respondent, and that the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations, or cash flows of the Company. However, the Company is unable to predict the outcome of these matters.
(8) SIGNIFICANT CUSTOMER AND DEPENDENCY ON KEY SUPPLIERS
Relatively few companies account for a substantial portion of the Company’s revenues. In the three months ended September 30, 2024, the Company did not have sales or outstanding accounts receivable balance that accounted for 10% of greater individually of the Company’s total net sales and accounts receivable, respectively. In the three months ended September 30, 2023, two companies, including a marketplace facilitator, accounted for 10% or greater individually and 80 % in the aggregate of the Company’s total net sales. At September 30, 2023, two companies with an accounts receivable balance of 10% or greater individually accounted for a combined 87 % of the Company’s accounts receivable.
The Company’s customers generally do not enter into long-term agreements obligating them to purchase products. The Company may not continue to receive significant revenues from any of these or from other large customers. A reduction or delay in orders from any of the Company’s significant customers, or a delay or default in payment by any significant customer could materially harm the Company’s business and prospects. Because of the Company’s significant customer concentration, its net sales and operating income could fluctuate significantly due to changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of the Company’s significant customers. The Company participates in the PC peripherals industry, which is characterized by aggressive pricing practices, continually changing customer demand patterns and rapid technological developments. The Company’s operating results could be adversely affected should the Company be unable to successfully anticipate customer demand accurately; manage its product transitions, inventory levels and manufacturing process efficiently; distribute its products quickly in response to customer demand; differentiate its products from those of its competitors or compete successfully in the markets for its new products.
The Company depends on many third-party suppliers for key components contained in its product offerings. For some of these components, the Company may only use a single source supplier, in part due to the lack of alternative sources of supply. During the three months ended September 30, 2024, the Company did not have any concentration of suppliers. During the three months ended September 30, 2023, the Company had one supplier that provided 100 % of the Company’s purchased inventory.
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(9) INCOME TAXES
During the three and nine months ended September 30, 2024, we recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated due to the uncertainty of realizing a benefit from those items.
We have evaluated the positive and negative evidence bearing upon the Company’s ability to realize its deferred tax assets, which primarily consist of net operating loss carryforwards and research and development tax credits. We considered the history of cumulative net losses, estimated future taxable income and prudent and feasible tax planning strategies and we have concluded that it is more likely than not that we will not realize the benefits of our deferred tax assets. As a result, as of September 30, 2024 and December 31, 2023, we recorded a full valuation allowance against our net deferred tax assets.
As of September 30, 2024 and December 31, 2023, the Company had federal net operating loss carry forwards of approximately $ 79.4 million and $ 76.9 million, respectively, which are available to offset future taxable income. They are due to expire in varying amounts from 2025 to 2042. Federal net operating losses occurring after December 31, 2018, of approximated $ 38.5 million may be carried forward indefinitely. As of September 30, 2024 and December 31, 2023, the Company had state net operating loss carry forwards of approximately $ 48.0 million and $ 44.9 million, respectively, which are available to offset future taxable income. They are due to expire in varying amounts from 2033 through 2041. We recorded minimum state income taxes and taxes related to our operations in Mexico. For the three months ended September 30, 2024 and 2023, income tax expense was $0 - thousand and $24 ( 525 ) thousand, respectively. For the nine months ended September 30, 2024 and 2023, income tax expense (benefit) was $(11) ( 11,216 ) thousand and $24 24,451 thousand, respectively.
(10) RELATED PARTY TRANSACTIONS
The Company leased office space located at 848 Elm Street, Manchester, NH. The landlord is an affiliate entity owned by Mr. Hitchcock. The two-year facility lease agreement was effective from August 1, 2019, to July 31, 2021 and was extended to July 31, 2022. On July 18, 2022, the lease agreement was amended to a month-to-month lease arrangement and may be terminated by either party with a 60-day notice. The Company terminated the lease during the period ended September 30, 2024. The facility lease agreement provided for 2,656 square feet. For the three-months period ended September 30, 2024 and 2023, the rent expense was $ 0 thousand and $ 9 thousand, respectively. For the nine-months period ended September 30, 2024 and 2023, the rent expense was $ 27 thousand and $ 27 thousand, respectively.
On November 30, 2022, the Company and Slingshot Capital, LLC (“Slingshot Capital”) entered into a Bridge Loan Agreement (the “Bridge Loan Agreement”) pursuant to which Slingshot Capital agreed to make available a bridge loan in the principal amount up of up to $ 1,500,000 . The Company has drawn down $ 1,000,000 under the Bridge Loan Agreement. Subject to Slingshot Capital’s sole discretion, the other $ 500,000 may be drawn by the Company.
On December 6, 2023, the Company and Slingshot Capital entered into a Debt Conversion Agreement (“Conversion Agreement”) pursuant to which the Company agreed to issue 734,343 shares of the Company’s common stock (based on $ 1.533 per share) (the “Shares”) in exchange for the cancellation of a total principal amount of $ 1,000,000 (“Principal Amount”) outstanding under the Bridge Loan Agreement and Bridge Term Note (collectively, the “Loan Agreements”), with Slingshot Capital, plus $ 125,778 in accrued and unpaid interest on such Principal Amount as of December 6, 2023. The price per share used in the exchanged was determined by the weighted average price per share and trade volume on September 13, 2023 and November 28, 2023.
Slingshot Capital is owned by the Company’s former Chairperson of the Board and a former Board Member, Jeremy Hitchcock and Elizabeth Hitchcock, respectively.
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(11) EARNINGS (LOSS) PER SHARE
Net loss per share for the three and nine months ended September 30, 2024 and 2023, respectively, are as follows:
Schedule of net income (loss) per share
Three Months Ended
Nine Months Ended
September 30,
2024
September 30,
2023
September 30,
2024
September 30,
2023
Numerator:
Net loss
$
( 625,067
)
$
( 6,820,287
)
$
( 4,371,934
)
$
( 16,488,425
)
Denominator:
Weighted average common shares - basic
2,866,594
1,890,933
2,815,907
1,886,465
Effect of dilutive common share equivalents
-
-
-
-
Weighted average common shares - dilutive
2,866,594
1,890,933
2,815,907
1,886,465
Basic and diluted
$
( 0.22
)
$
( 3.61
)
$
( 1.55
)
$
( 8.74
)
Diluted loss per common share for the three and nine months ended September 30, 2024 and 2023 excludes the effects of 5,230,769 and 2,080 common share equivalents, respectively, since such inclusion would be anti-dilutive. The common share equivalents consist of shares of common stock issuable upon exercise of outstanding preferred stock, warrants, restricted stock units, and stock options.
(12) EQUITY
Preferred Stock and Warrants
On January 23, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with David Lazar (“Lazar”), a member of our Board of Directors, whereby, at the closing of the transactions contemplated by the Purchase Agreement (the “Closing”), the Company sold and Lazar (or to any transferee of Lazar’s which acquires the Securities Purchase Rights, as defined below, hereinafter a “Lazar Transferee”) purchased two million 2,000,000 shares of the Company’s preferred stock, $ 0.001 par value per share (the “Preferred Stock”), at a price per share of $ 1.40 , for an aggregate purchase price of $ 2,800,000 , subject to the conditions described below, pursuant to the exemptions afforded by the Securities Act of 1933, as amended, and Regulation S thereunder. Under the Purchase Agreement, the Company agreed to designate 2,000,000 of the Preferred Stock as Series A Preferred Stock (the “Series A Preferred Stock”) for the sale to Lazar (or a Lazar Transferee). Each share of Series A Preferred Stock shall be convertible, at the option of the holder, into 1.4 shares of common stock of the Company, $0.01 par value per share (the “Common Stock”), and vote on an “as-if-converted” basis and shall have full ratchet protection in any subsequent offerings. Pursuant to the Purchase Agreement, the Company shall also issue Lazar (or a Lazar Transferee) warrants to purchase up to an additional 2,800,000 shares of Common Stock, with an exercise price equal to $1.00 per share, subject to adjustment therein (the “Warrants”, and together with the Series A Preferred Stock, the “Purchased Securities”).
The Company evaluated the Series A Preferred Stock and Warrants for liability or equity classification in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity , and determined that equity treatment was appropriate because neither the Series A Preferred Stock nor the Warrants met the definition of liability instruments.
The Warrants are classified as component of permanent equity because they are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, and permit the holder to receive a fixed number of shares of common stock upon exercise. In addition, the Warrants do not provide any guarantee of value or return. The Company valued the Warrants at issuance using the Black-Scholes option pricing model and determined the fair value of the Warrants to purchase 2,800,000 shares of the Company’s common stock at $ 4.7 million. The key inputs to the valuation model included a weighted average volatility of 162.0 % and an expected term of 3.0 years.
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The proceeds from the issuance of the Series A Preferred Stock to the Company were allocated based on the relative fair value of the Warrants as compared to the fair value of the Series A Preferred Stock. The fair value of the Warrants incorporates assumptions regarding our common stock price, dividend yield, stock price volatility, as well as assumptions regarding the risk-free interest rate. Using this model, the Warrants was valued at $ 1.4 million at January 23, 2024 and was included in additional paid in capital on our condensed consolidated balance sheet.
The fair value of the Series A Preferred Stock was determined based on assumptions that incorporated our common stock price and dividend rate. The Company valued the Series A Preferred Stock at $ 4.5 million. Based on the fair value model to allocate the Series A Preferred Stock proceeds, the Series A Preferred Stock was valued at $ 1.4 million at January 23, 2024 and was included in Series A Preferred Stock on our condensed consolidated balance sheet.
On February 26, 2024, the Company held a special meeting of stockholders, who voted and approved (i) the issuance of shares of our common stock, par value $0.01 per share (“Common Stock”) upon conversion of Series A Preferred Stock or exercise of the Warrants to be issued at Closing of the Purchase Agreement, which conversions or exercise would result in a “change of control” of the Company under the applicable rules of Nasdaq and (ii) an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect the increase in authorized shares of Preferred Stock to 10,000,000 .
Common Stock
In January 2024 and September 2024, the Company issued 156,880 and 612,892 , respectively, shares of common stock to board members in exchange for services performed and recorded $ 378,081 in stock-based compensation expense and $ 465,482 in reduction to accrued expenses, respectively. The Company issued 20,000 and 135,000 shares of common stock to vendors in exchange for services performed in 2024. The Company recorded $ 48,200 and $ 5,400 in stock-based compensation expense in January 2024 and September 2024.
(13) SUBSEQUENT EVENTS
Securities Purchase Agreement
On November 18, 2024, the Company
entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Cao Yu, an individual (“Cao”), Hu
Bin, an individual, and Youxin Consulting Limited, a Hong Kong company (the “Investors”), whereby, at the closing of the
transactions contemplated by the Purchase Agreement (the “Closing”), subject to satisfaction of certain closing conditions,
including our stockholders voting in favor of the transaction at a Special Meeting, the Company will sell and the Investors will purchase
1,984,733
shares of the Company’s newly formed Series B preferred stock, $ 0.001
par value per share (the “Preferred Stock”), at a price per share of $ 1.31 ,
for an aggregate purchase price of $ 2,600,000 ,
subject to the conditions described below, pursuant to the exemptions afforded by the Securities Act of 1933, as amended, and Regulation
S thereunder.
The Purchase Agreement contains
customary representations, warranties and agreements of the Company and the Investors, limitations and conditions regarding sales of
the Purchased Securities or underlying Common Stock, indemnification rights and other obligations of the parties. Furthermore, the Purchase
Agreement contains certain conditions to closing, including: (i) a resolution appointing three (3) individuals identified in writing
by the Investors to fill the vacancies on the Board of Directors caused by the resignations of all of the members of the Board of Directors
as of the Closing Date, (ii) satisfactory evidence that all reasonably required waivers and/or settlement agreements with the Company’s
creditors, vendors and employees have been received, (iii) the Certificate of Designation of the rights and privileges of the Series
B Preferred Stock, (iv) satisfactory evidence that all third-party and governmental consents have been received or sent and not revoked,
(v) satisfactory evidence that all holders of equity of the Company with redemption rights or rights to participate in the issuance of
Series B Preferred Stock and the shares of Common Stock issuable upon conversion of such shares, if any, have been waived, (vi) satisfactory
evidence that all persons with the right to receive severance, retention bonuses, “stay” bonuses, change in control bonuses,
transaction bonuses or other similar payments or arrangements have waived any and all rights to receive such bonuses, (vii) satisfactory
evidence that identified all related party transactions have been terminated, (viii) satisfactory evidence that all employment agreements
have been terminated, (ix) satisfactory evidence that a satisfactory written opinion of the Company’s counsel that all of the Series
B Preferred Stock and the securities to be purchased pursuant to the Securities Purchase Agreement, dated on even date of the Purchase
Agreement, by and among David Elliot Lazar and the Investors are, and the shares of Common Stock underlying the Series B Preferred Stock
will be, duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities
laws, and none of such shares was or would be issued in violation of any preemptive rights or similar rights to subscribe for or purchase
securities, (x) the Company’s shares be listed on the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, or any successors to any of the foregoing by no later than December 31, 2024, and (xi) the approval from the stockholders
of the Company of the transactions contemplated by the Purchase Agreement.
The Company has evaluated subsequent events from September 30, 2024, through the date of this filing and has determined that there are no such events, other than those noted above, requiring recognition or disclosure in the financial statements.
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