What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 74 added, 147 removed, 65 unchanged (77% of the section changed)

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The following discussion and analysis of the results of operations and financial condition of KULR Technology Group, Inc.

(“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the three and nine months ended September 30, 2022 and 2021 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those unaudited condensed consolidated financial statements that are included elsewhere in this Quarterly Report.

(“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the three months ended March 31, 2023 and 2022 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those unaudited condensed consolidated financial statements that are included elsewhere in this Quarterly Report.

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company.

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Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Quarterly Report, and other factors that we may not know.

There have been no material changes to the risk factors discussed in Item 1A.

Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on March 28, 2023.

KULR Technology Group develops and commercializes an energy management platform to accelerate the global transition to a sustainable electrification economy.

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and completing the circular economy through recycling.

KULR ONE and KULR ONE Design Solutions (K1DS)

The KULR ONE family of battery packs represent a groundbreaking innovation that is driving the world’s transition to a more sustainable electrification economy.

These revolutionary designs offer a unique combination of cutting-edge features, including unparalleled safety, exceptional performance, intelligent functionality, modular construction, reliability, and customizability.

The KULR ONE battery packs have been engineered to meet the exacting demands of the world’s most demanding applications.

They offer a comprehensive solution that addresses the critical need for safe and reliable energy storage in a wide range of industries, from aerospace and defense to electric vehicles and consumer electronics.

One of the key features of the KULR ONE family of battery packs is its modular design.

This allows for greater flexibility as customers can easily adjust the size and configuration of the battery pack to suit their specific application requirements.

The intelligent functionality of the KULR ONE packs also allows for real-time monitoring and optimization of battery performance, ensuring optimal efficiency and longevity.

In addition to offering exceptional performance and reliability, the KULR ONE battery packs are also designed with safety as a top priority.

They incorporate state-of-the-art thermal management technology to prevent overheating and ensure safe operation even in the most challenging environments.

Overall, the KULR ONE family of battery packs is at the forefront of the global drive towards sustainable electrification.

With its unparalleled combination of safety, performance, intelligence, modularity, reliability, and customizability, KULR ONE is positioned to revolutionize the way we think about energy storage and powering the world’s most demanding applications.

KULR’s holistic suite of battery safety and thermal energy management products and services include:

Passive Propagation Resistant (“PPR”) design and testing, Internal Short Circuit (“ISC”) trigger cells, Fractional Thermal Runaway Calorimeter (“FTRC”) testing and an AI-powered CellCheck battery management system.

The following picture illustrates the different products and services offered by KULR in this holistic approach.

As a result of this holistic approach, KULR offers a wide range of products and services as part of a total solutions package for battery thermal and safety management shown below:

Here is an example of how our holistic approach helps an electric aviation customer.

Last year, KULR provided H55, a leading enabler for electric aviation offering certified electric propulsion and battery solutions, with a thermal management solution for its hybrid-electric propulsion flight demonstrator program with Pratt & Whitney Canada.

Utilizing KULR’s thermal design architecture, H55 was awarded production organization approval (“POA”) by the Swiss Federal Office for Civil Aviation in January 2022 followed by its design organization approval (“DOA”) from the European Union Aviation Safety Agency (“EASA”) in June 2022.

With the DOA and POA secured, H55 is expected to receive its type certificate for its 100kW electric propulsion system targeted for CS23 aircrafts at the end of 2023.

Through the VibeTech acquisition, KULR is expanding itself as a vertically integrated energy management company focused on sustainable energy solutions.

The new product KULR VIBE is a patented artificial intelligence (AI) solution with “learning” algorithms that utilize data from sensors to reduce vibration for a more energy efficient system.

KULR VIBE Solution

During 2022, we acquired intellectual property from Vibetech International, LLC (“Vibetech”), which allows KULR to expand itself as a vertically integrated energy management company focused on sustainable energy solutions.

For nearly twenty years, the primary application has been aviation.

However, advances in measurement and computing technologies have allowed KULR VIBE to provide transformative and scalable solutions across transportation, renewable energy (wind farm), manufacturing, industrial, performance racing and autonomous aerial (drone) applications among others.

KULR VIBE Solution

KULR VIBE addresses one the most challenging issues with advanced machinery today;

excessive energy robbing vibrations that are destructive to both the machinery and in many cases the operator.

The KULR VIBE suite of technologies utilize proprietary sensor processes with advanced learning algorithms to both achieve precision balancing solutions, and successfully predict component failure based on its comprehensive database of vibration signatures.

KULR VIBE suite of technologies utilize proprietary sensor processes with advanced learning algorithms to both achieve precision balancing solutions, and successfully predict component failure based on its comprehensive database of vibration signatures.

Its enhanced AI learning algorithms pinpoint areas where excess vibrations cause a loss of energy that can lead to system malfunctions, weakened performance, and maintenance issues.

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We are building our AI infrastructure on industry leading Nvidia and AMD semiconductor platforms, and they are hosted on a hybrid of private cloud and Microsoft Azure.

As the world faces shortages in supply of raw materials to produce enough Li-ion batteries to power everything from EV’s to smartphones, KULR is developing a modular battery storage architecture that can be used across multiple applications with real-time monitoring by AI-powered CellCheck.

This product is to target the following markets:

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● Residential and commercial energy storage systems

Through our partnership with MoliCel, KULR has access to best-in-class Li-ion battery cells with high power and energy to build battery modules with the highest safety ratings.

As part of the strategic relationship, KULR has access to over 700MWh of battery energy capacity to further accelerate its production and supply chain localization initiatives within North America.

Securing this MoliCel battery cell supply accelerates our ability to provide total solutions to high value customer applications with revenue potential that could exceed $350 million annually in five years.

Recent Developments

Sales and Marketing

The KULR sales and marketing team expands its customer engagements through direct sales and Manufacturer’s Representative team to support some East Coast customers.

KULR has over 300 customer engagements by the end of Q3 2022 with some of the world’s largest industrial and commercial companies such as Lockheed Martin, Ball Aerospace, SAFT, General Motors, Cirba, Redwood Materials, Leidos Holdings, Meta Platforms Inc, Viridi and BOSCH.

As we continue to expand our relationship with major partners such Lockheed Martin across our product portfolio, we expect to cross-sell and up-sell our total solution package to these customers.

In September, KULR received approval from the Department of Transportation (“DoT”) to increase the energy levels in three special permits from 2.1 kWh to 2.5 kWh, expanding usage for its SafeCase product.

KULR will utilize the permit upgrades to support a recently-awarded project with one of the three largest outdoor rider landscaping companies in the world for the safe shipment and storage of Li-Ion batteries.

The permit approval restates the safety of KULR’s SafeCase product for transportation and storage of Li-Ion batteries, and will enable the large landscaping equipment customer to safely transport its batteries for services or end of life (“EOL”) on its new line of higher-capacity landscaping electric vehicles.

In addition to this project, the permit upgrades are expected to generate expanded use cases for the SafeCase product with existing and new customers.

With the signing of Assembly Bill No.

1346 in October 2021, California was the first state to prohibit the sale of gas-powered landscaping equipment.

The legislation came following Governor Newsom’s 2020 executive order prohibiting the sale of all gas-powered vehicles by 2035.

The bill is expected to drive the growth of e-powered landscaping equipment, which is projected to hit $43.2 billion by 2029 and exhibit a CAGR of 5.3% during the forecast period.

Operations and HR

The KULR organization took a tremendous leap forward in completing ISO 9001 certification for our San Diego headquarter facility during the quarter.

This is an exceptional accomplishment for the team and demonstrates KULR’s dedication is pursuit of manufacturing excellence and operational controls.

Our fully automated battery testing capability has begun installation with initial processing capabilities of approximately 500,000 18650/21700 cells annually in support of NASA WI-37.

System installation will complete in Q4’22 with full capacity processing.

This capability will be used to support NASA and DOD battery cell deployments as well as for internal demands related to KULR qualified cells deployments.

KULR hired an additional 8 permanent employees during the third quarter and maintains an outsource strategy for software development and volume TRS manufacturing.

We have 50 full-time and two part-time employees as of September 30, 2022.

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic.

During 2020 and continuing into 2022, the global economy has been, and continues to be, affected by COVID-19.

While we continues to see signs of economic recovery as certain governments begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions.

Although recent cases and deaths from the COVID-19 pandemic have generally declined in the United States, spread of COVID-19 in China recently resulted in a temporary lockdown covering all of Shanghai, China where our manufacturing partner has its headquarters.

During the first quarter of 2022, we experienced significant impact to our business due to the COVID-19 lockdown in China.

As of March 2022, inventory in excess of $325,000 could not be shipped due to the COVID-19 lockdown in Shanghai.

The product was shipped, and revenue was recognized during the second quarter COVID-related challenges have resulted in delays in product shipment, not cancellations.

As restrictions ease in the coming months, we expect to make up for lost time and revenue as we move through our sizeable inventory.

We are currently taking active steps to direct our production and supply chain activities to North America to geographically diversify and potentially reduce further COVID-19 impacts.

The full extent of the future impact of COVID-19 on our operations and financial condition is uncertain.

Accordingly, COVID-19 could have a material adverse effect on our business, results of operations, financial condition and prospects during 2022 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular research and development and manufacturing schedules, as well as the capability to meet customer demands in a timely manner.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Appointment of Chief Financial Officer

Effective as of March 31, 2023, Shawn Canter was appointed Chief Financial Officer of the Company.

In connection with his appointment, Mr.

Canter was granted 1,500,000 shares of the Company’s common stock, which shall vest in five (5) equal annual installments.

Financing Activities

On May 13, 2022, we entered into a Standby Equity Purchase Agreement (the “SEPA”) with YA II PN, Ltd.

(“Yorkville”).

Pursuant to the SEPA, we have the right, but not the obligation, to sell to Yorkville up to $50,000,000 of our shares of common stock any time during the 24-month term of the agreement.

Please refer to Note 11 to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q for additional details regarding the SEPA.

Concurrently with the SEPA, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Yorkville, pursuant to which we issued to the Investor a promissory note which bears interest at 10% with an initial principal amount equal to $5,000,000 (the “Promissory Note”) for which we received gross proceeds of $4,750,000.

As of September 20, principal and interest owed on this promissory note has been paid in full.

Please refer to Note 10 to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q for additional details regarding the Note Purchase Agreement.

On September 23, 2022, we entered into a Supplemental Agreement (the “Supplemental Agreement”) to the SEPA.

Under the Supplemental Agreement, we may from time to time request cash advances of up to $15,000,000 (each, a “Prepaid Advance”) from Yorkville.

Cash proceeds received under the SEPA and the Supplemental Agreement are limited to an aggregate amount of $50,000,000.

Pursuant to the terms of the Supplemental Agreement, Yorkville has the right to receive shares to pay down Prepaid Advances, and may select the timing and delivery of such shares in an amount up to the balance of the Prepaid Advance.

On September 23, 2022, the Company received an Initial Advance for gross proceeds of $15,000,000, of which, $3,850,000 was used to repay amounts due under a Note Purchase Agreement with Yorkville.

We may not sell stock to Yorkville pursuant to the SEPA at any time that there is an outstanding Prepaid Advance liability balance.

Please refer to Note 9 to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q for additional details regarding the Supplemental Agreement.

Purchase Agreement

On October 5, 2022, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with a seller (the “Seller”), pursuant to which the Company purchased all of the assets, including intellectual property, of the Seller (the “Acquired Assets”) for consideration of $3,500,000, of which, $2,000,000 (the “Cash Consideration”) will be paid in cash and the Company will issue shares of common stock worth $1,500,000 (the “Equity Consideration”).

The Company will issue the Equity Consideration in four equal installments on the following dates:

(i) October 5, 2023, (ii) October 5, 2024, (iii) October 5, 2025, and (iv) October 5, 2026.

The Company will pay the Cash Consideration as follows:

$1,000,000 on October 6, 2022, $500,000 on April 5, 2023, and $500,000 on October 5, 2023.

The Purchase Agreement includes customary representations, warranties and covenants of the Company and the Seller.

The Purchase Agreement also contains post-closing indemnification provisions pursuant to which the parties have agreed to indemnify each other against losses resulting from certain events, including breaches of representations and warranties, covenants and certain other matters.

On March 10, 2023, the Company received gross proceeds of $2,000,000 as a prepaid advance (the “Second Prepaid Advance”) pursuant to a supplemental agreement (the “Supplemental Agreement”) to its Standby Equity Purchase Agreement (the “SEPA”).

The Second Prepaid Advance matures on March 10, 2024.

Interest accrues on the outstanding balance of each Prepaid Advance at an annual rate of 10%, subject to an increase to 15% upon events of default as defined.

Please refer to Note 8 – Prepaid Advance Liability and Note 12 – Stockholders’ Equity, Standby Purchase Agreement “SEPA” and Supplemental SEPA, in the accompanying condensed consolidated financial statements of this quarterly report on Form 10-Q for additional details regarding the SEPA and Supplemental SEPA.

Results of Operations

Three and Nine Months Ended September 30, 2022 Compared With Three and Nine Months Ended September 30, 2021

Three Months Ended March 31, 2023 Compared With Three Months Ended March 31, 2022

Our revenues consisted of the following types:

For the Three Months Ended

For the Nine Months Ended

September 30,

Product sales

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Total revenue

For the three months ended September 30, 2022 and 2021, we generated $1,393,185 and $600,921 of revenues from 16 and 7 customers, respectively, representing an increase of $792,264, or 132%.

For the nine months ended September 30, 2022 and 2021, we generated $2,181,230 and $1,647,070 of revenues, respectively, representing an increase of $534,160, or 32%, resulting from two contracts received during the third quarter of 2022.

Revenue from product sales during the three months ended September 30, 2022 increased by $768,936 or 128% compared to the three months ended September 30, 2021.

Revenue from product sales during the nine months ended September 30, 2022 increased by $743,590 or 55% compared to the nine months ended September 30, 2021.

Product sales during these periods include sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials.

Revenue from contract services during the three months ended September 30, 2022 increased by approximately $23,328 compared to the three months ended September 30, 2021.

Revenue from contract services during the nine months ended September 30, 2022 decreased by approximately $209,430 or 72% compared to the nine months ended September 30, 2021.

The decrease in revenue for the nine months ended September 30, 2022 is primarily attributable to three large DOD contracts which generated $263,656 of revenues during the nine months ended September 30, 2021.

Our service revenues, which include certain research and development contracts and onsite engineering services, have not been hampered by restrictions arising from working under COVID-19 shelter-in-place regulations.

For the three months ended March 31, 2023 and 2022, we generated $1,759,802 and $200,499 of revenues from 14 and 11 customers, respectively, representing an increase of $1,559,303, or 778%.

Revenue from product sales during the three months ended March 31, 2023 increased by $1,456,659 or 844% compared to the three months ended March 31, 2022.

Product sales during the three months ended March 31, 2023, included sales of our component product, internal short circuit (“ISC”) battery cells and devices, and patented Thermal Runway Shield (“TRS”) technology.

Revenue from contract services during the three months ended March 31, 2023 increased by $102,644 or 368 % compared to the three months ended March 31, 2022.

Four contracts received during the first quarter of 2023 generated $127,544 of service revenues.

Our service revenues, include certain research and development contracts and onsite engineering services.

Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization.

Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment.

Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable, and lumpy, which can influence the timing, consistency and reporting of sales growth.

Cost of Revenues

Cost of revenues consisted of the cost of our products as well as labor expenses directly related to product sales or research contract services.

Generally, we earn greater margins on revenue from products as compared to revenue from services, so product mix plays an important part in our reported average margins for any period.

Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy and unpredictable, which can influence the timing, consistency and reporting of sales growth.

Cost of Revenue

Cost of revenue consisted of the cost of our products as well as labor expenses directly related to product sales and research contract services.

Product mix plays an important part in our reported average margins for any period.

Also, we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between periods, customers and products due to the learning process, customer negotiating strengths, and product mix.

The Company expects that margins will normalize as it prepares for the anticipated volume production of its product mix.

For the three months ended September 30, 2022 and 2021, cost of revenues was $932,364 and $155,138, respectively, representing an increase of $777,226, or 501%.

The increase was primarily due to increased labor costs to produce finished goods, costs to procure customized finished goods and component material for a new product line, and shipping costs from our foreign manufacturer.

The gross margin percentage was 33% and 74% for the three months ended September 30, 2022 and 2021, respectively.

The decrease in margins realized during the three months ended September 30, 2022 is primarily attributable to the large concentration of new product shipments to customers, an increase in headcount for production, new costs related to material for our new Safe Case product and customized RPS50 kits, and shipping costs from our foreign manufacturers.

For the nine months ended September 30, 2022 and 2021, cost of revenues was $1,478,954 and $869,612, respectively, representing an increase of $609,342, or 70%.

The gross margin percentage was 32% and 47% for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in margins realized during the nine months ended September 30, 2022 is primarily attributable to new product shipments to customers, an increase in headcount for production, new costs for materials for our new Safe Case product and customized RPS50 kits, and shipping costs from our foreign manufacturers.

For the three months ended March 31, 2023 and 2022, cost of revenues was $1,116,415 and $122,918, respectively, representing an increase of $993,497 or 808%.

The increase was primarily due to $908,377 of costs incurred to procure customized finished goods and component materials for a new product line, increased labor costs of $48,309, and an increase of $31,878 in depreciation expense due to revenue generating equipment placed in service during the period.

The gross margin percentage was 37% and 39% for the three months ended March 31, 2023 and 2022, respectively.

Research and Development

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Research and development expenses are charged to operations as incurred.

For the three months ended September 30, 2022 and 2021, R&D expenses were $1,069,852 and $481,855, respectively, representing an increase of $587,997 or 122%.

The increase during 2022 was comprised primarily of approximately $352,000 related to planned increases in headcount in order to build future capacity, and $236,000 related to R&D initiatives designed to build future revenue growth.

For the nine months ended September 30, 2022 and 2021, R&D expenses were $2,790,683 and $957,579, respectively, representing an increase of $1,833,104 or 191%.

The increase is primarily comprised of approximately $977,000 related to planned increases in headcount in order to build future capacity, and $856,000 related to R&D initiatives designed to build future revenue growth.

For the three months ended March 31, 2023 and 2022, R&D expenses were $1,388,215 and $721,347, respectively, representing an increase of $666,868 or 92%.

The increase during 2023 was comprised primarily of $546,845 related to planned increases in headcount in order to build future capacity, and $94,824 related to R&D initiatives designed to build future revenue growth.

We expect that our R&D expenses will increase as we expand our future operations.

Selling, General and Administrative

Selling, general and administrative expenses consisted primarily of stock-based compensation, payroll taxes and other benefits, consulting fees, registration fees, office expenses, rent expense, directors and officers’ insurance, travel and entertainment, marketing and advertising, and filing fees.

For the three months ended September 30, 2022 and 2021, selling, general and administrative expenses were $4,349,373 and $3,104,410, respectively, an increase of $1,244,963, or 40%.

The increase is primarily due to an increase in marketing and advertising expenses as well as an increase in labor costs to build future capacity for planned revenue growth.

For the nine months ended September 30, 2022 and 2021, selling, general and administrative expenses were $12,210,458 and $7,320,524, respectively, an increase of $4,889,934, or 67%.

The increase is primarily due to an increase in marketing and advertising expenses as well as an increase in labor costs to build future capacity for planned revenue growth.

Other (Expense) Income

For the three months ended September 30, 2022 and 2021, net other (expense) income was ($628,181) and $44,550, respectively, representing a change of $672,731.

The increase in expense is primarily attributable to the increase in interest expense and discount amortization recorded in connection with notes payable and the Prepaid Advance issued in 2022 of approximately $633,000, and increase in the amortization of debt discount of approximately $172,000, the loss on debt extinguishment of approximately $9,000, and the change in fair value of accrued issuable equity of approximately $18,000, partially offset by the gain recorded in connection with the forgiveness of the PPP Loan of approximately $159,000.

During the three months ended September 30, 2022, the Company recorded interest expense related to a note payable in the amount of $608,028 which included $123,027 of stated interest, $385,000 for a 10% payment premium, and $100,000 for a late payment premium.

For the nine months ended September 30, 2022 and 2021, net other expense was $678,960 and $337,153, respectively, representing a change of $341,807.

The change is primarily attributable to the increase in interest expense and discount amortization recorded in connection with notes payable and the Prepaid Advance of approximately $674,000, an increase in the amortization of debt discount of approximately $147,000, and the loss on debt extinguishment of approximately $9,000, partially offset by the change in fair value of accrued issuable equity of approximately $189,000, the gain recorded in connection with the forgiveness of the PPP Loan of approximately $159,000, and the decrease in debt redemption costs of approximately $140,000.

During the nine months ended September 30, 2022, the Company recorded interest expense related to a note payable in the amount of $650,493, which included $165,493 of stated interest incurred, $385,000 for 10% payment premium, and $100,000 for a late payment premium.

Selling, general and administrative expenses consisted primarily of cash and stock-based compensation, payroll taxes and other benefits, consulting fees, registration fees, office expenses, rent expense, directors and officers insurance, travel and entertainment, marketing and advertising, and filing fees.

For the three months ended March 31, 2023 and 2022, selling, general and administrative expenses were $5,515,891 and $3,534,923, respectively, representing an increase of $1,980,968, or 56%.

The increase is primarily due to an increase in labor costs of $922,642, consulting fees of $371,659, and marketing and advertising expenses of $527,407, partially offset by a decrease of $322,767 in stock-based compensation.

Other Income (Expense)

For the three months ended March 31, 2023 and 2022, other income (expense) was ($342,143) and $42,134, respectively, representing a decrease of $384,277, or 912%.

The change is primarily attributable to an additional $246,320 for amortization of debt discount in connection with the Prepaid Advance, an additional $159,931 for interest recorded in connection with Prepaid Advance, partially offset by a $21,068 change in fair value of accrued issuable equity.

Liquidity and Capital Resources

As of September 30, 2022 and December 31, 2021, we had cash balances of $16,168,863 and $14,863,301, respectively, and working capital of $2,077,848 and $13,302,935, respectively.

On May 13, 2022, we issued a $5,000,000 Promissory Note to Yorkville for gross proceeds of $4,750,000.

On the same date, we entered into the SEPA which gives us the right, but not the obligation, to sell up to $50,000,000 of shares of our common stock to Yorkville during the 24 months following the effective date of the SEPA.

Further, on September 23, 2022, we entered into the Supplemental SEPA, which allows us to request advances (“Prepaid Advances”), still up to an aggregate of $50,000,000, from Yorkville.

Pursuant to the terms of the Supplemental SEPA, Yorkville has the right to receive shares, and may select the timing and delivery of such shares (via an “Investor Notice”), in an amount up to the balance of the Prepaid Advance in order to pay down the Prepaid Advance.

The aggregate common shares issued under the SEPA and the Supplemental SEPA cannot exceed $50,000,000.

We may not request that the investor purchase shares pursuant to the SEPA at any time that there is an outstanding balance owed under a Prepaid Advance.

See Financing Activities under Recent Developments above for additional details.

During September and October 2022, the Company issued 5,375,269 shares of common stock, at purchase prices per share ranging from $0.99 to $1.84, in satisfaction of the initial Prepaid Advance liability in the amount of $6,000,000.

As of November 14, 2022, the remaining balance on the initial Prepaid Advance is $9,000,000.

See Note 9 - Prepaid Advance Liability for additional information.

For the nine months ended September 30, 2022 and 2021, cash used in operating activities was $13,366,007 and $5,394,936, respectively.

Our cash used in operations for the nine months ended September 30, 2022 was primarily attributable to our net loss of $14,977,825, adjusted for non-cash expenses in the aggregate amount of $4,072,738, as well as $2,460,920 of net cash used to fund changes in the levels of operating assets and liabilities.

Our cash used in operations for the nine months ended September 30, 2021 was primarily attributable to our net loss of $7,837,798, adjusted for non-cash expenses in the aggregate amount of $2,989,597, and $546,735 of net cash used to fund changes in the levels of operating assets and liabilities.

For the nine months ended September 30, 2022 and 2021, cash used in investing activities was $2,772,568 and $1,386,864, respectively.

Cash used in investing activities during the nine months ended September 30, 2022 was related to deposits paid for equipment of $2,198,626 and purchases of property and equipment of $573,942.

Cash used in investing activities during the nine months ended September 30, 2021 was related to deposits paid for equipment of $1,029,805 and purchases of property and equipment of $357,059.

For the nine months ended September 30, 2022 and 2021, cash provided by financing activities was $17,444,137 and $8,891,716, respectively.

Cash provided by financing activities during the nine months ended September 30, 2022 was due to proceeds from the Prepaid Advance of $10,573,068, proceeds from a promissory note of $4,750,000, proceeds from the exercise of warrants of $3,020,836, proceeds from the SEPA of $247,871, and proceeds from the exercise of options of $25,233, partially offset by repayments of the promissory note of $1,000,000, and payments of issuance costs related to the prepaid advance liability of $85,000, deferred financing costs related to the SEPA for $72,800 and payments of issuance costs in connection with notes payable for $17,200.

Cash provided by financing activities during the nine months ended September 30, 2021 was due to $6,500,000 of proceeds from the sale of preferred stock, common stock and warrants, and $5,206,716 received in connection with the exercise of warrants, partially offset by the $2,450,000 of principal repayments on notes payable and $365,000 of financing costs paid during the period.

As of September 30, 2022, future cash requirements for our current liabilities include approximately $2,781,095 for accounts payable and accrued expenses and approximately $218,875 for future payments under operating leases.

The Company has also committed to spend $950,000 related to the extension of a sponsorship agreement, $1,112,239 related to capital expenditures for automation and testing equipment, approximately $946,836 for the construction of a new automation facility, and $464,389 for research and development.

Future cash commitments for long term liabilities consists of $155,765 for the long-term lease.

As of September 30, 2022, the Company also has $14,750,000 of principal outstanding for a prepaid advance liability pursuant to the Supplemental SEPA.

Subsequent to September 30, 2022, the Company issued 5,153,664 shares of common stock to pay down $5,750,000 of Prepaid Advance.

As of the filing date of this Form 10-Q, the principal balance due on the Prepaid Advance is $9,000,000.

While the Company expects that the prepaid advance liability will be repaid with the issuance of common stock, any prepaid advance balances outstanding for more than twelve months must be repaid in cash.

The Company intends to meet its cash requirements from its current cash balance, proceeds from the SEPA or the Supplemental SEPA, and from future revenues.

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic.

During 2020 and continuing into 2022, the global economy has been, and continues to be, affected by COVID-19.

While the Company continues to see signs of economic recovery as certain governments begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions.

The Company continues to monitor the impact of COVID-19 on its business and operational assumptions;

however, given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.

The short and long-term worldwide implications of Russia’s invasion of Ukraine are difficult to predict at this time.

The imposition of sanctions on Russia by the United States or other countries and possible counter sanctions by Russia, and the resulting economic impacts on oil prices and other materials and goods, could affect the price of materials used in the manufacture of our products.

If the price of materials used in the manufacturing of our products increase, that could adversely affect our business and the results of our operations.

As of March 31, 2023 and December 2022, we had cash balances of $7,186,034 and $10,333,563, respectively, and working capital of $414,334 and $6,055,477, respectively.

For the three months ended March 31, 2023 and 2022, cash used in operating activities was $4,759,039 and $4,574,490, respectively.

Our cash used in operations for the three months ended March 31, 2023 was primarily attributable to our net loss of $6,602,861, adjusted for non-cash expenses in the aggregate amount of $1,414,023, as well as $429,799 of net cash generated by changes in the levels of operating assets and liabilities.

Our cash used in operations for the three months ended March 31, 2022 was primarily attributable to our net loss of $4,136,555, adjusted for non-cash expenses in the aggregate amount of $1,436,127, as well as $1,874,062 of net cash used to fund changes in the levels of operating assets and liabilities.

For the three months ended March 31, 2023 and 2022, cash used in investing activities was $358,490 and $248,889, respectively.

Cash used in investing activities during the three months ended March 31, 2023 included $298,490 related to purchases of property and equipment and $60,000 for the acquisition of intangible assets.

Cash used in investing activities during the three months ended March 31, 2022 was related to deposits paid for equipment of $227,538 and purchases of property and equipment of $21,351.

For the three months ended March 31, 2023 and 2022, cash provided by financing activities was $1,970,000 and $92,754, respectively.

Cash provided by financing activities during the three months ended March 31, 2023 was due to proceeds from the prepaid advance liability of $2,000,000 less issuance costs on the prepaid advance liability of $30,000.

Cash provided by financing activities during the

three months ended March 31, 2022 was due to proceeds from the exercise of warrants of $87,679 and proceeds from the exercise of options of $5,075.

Future cash requirements for our current liabilities include $3,653,967 for accounts payable and accrued expenses and $269,967 for future payments under operating leases.

The Company has also committed to spend $1,000,000 in connection with an asset purchase agreement, $1,006,934 related to capital expenditures for automation equipment, $825,000 related to sponsorship agreements, and $441,192 for research and development.

Cash requirements for long-term liabilities consist of $39,427 for lease payments.

The Company intends to meet these cash requirements from its current cash balance, proceeds from the SEPA and from future revenues.

Our primary source of liquidity has historically been cash generated from equity and debt offerings.

Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued.

The above conditions are indicators that there is substantial doubt about our ability to continue as a going concern as we have a history of recurring net losses, recurring use of cash in operations and declining working capital.

Despite these conditions, we have a successful track record of raising capital as needed and continue to have a positive, ongoing relationship with a financial institution that has provided access to capital and will continue to support us.

While no assurance can be provided that we will be successful in raising additional capital from Yorkville, as they are not obligated to advance funds so long as there is an outstanding Prepaid Advance, Yorkville has represented that in most scenarios, with mutual consent, they will continue to provide financial support.

Upon satisfaction of the Prepaid Advance liability, the Company will utilize its ability to draw down on the remaining $33,000,000 available under the SEPA.

Based on the above, we believe we have sufficient liquidity and access to future capital to continue as a going concern for a period of at least twelve months from the date the financial statements have been issued and that our above plans alleviate any potential substantial doubt about our ability to continue as a going concern.

As of May 5, 2023, our cash balance was approximately $4.0 million.

Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.

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For a description of our critical accounting estimates, see Critical Accounting Estimates in Item 7 of our Annual Report on Form 10-K which was filed with the SEC on March 28, 2023.

There have been no changes to these critical accounting estimates since the Form 10-K was filed.

Recent Accounting Pronouncements

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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