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Item 7. Management’s Discussion and Analysis

2024-04-12 compared with 2023-03-28 · 116 added, 103 removed, 61 unchanged (78% 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 years ended December 31, 2022 and 2021 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report.

(“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the years ended December 31, 2023 and 2022 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included in Item 8 in this Annual 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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These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations.

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

Actual results could differ materially because of the factors discussed in Item 1A “Risk Factors” in this Annual Report, and other factors that we may not know.

KULR Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of battery-powered applications.

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Recent Developments

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

During 2020 and continuing into 2023, 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 and estimates and has determined there were no material adverse impacts on the Company’s results of operations and financial position at December 31, 2022.

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

Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2023 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.

War in Ukraine

Annual Revenues

The Company reported record annual revenues of $9.8 million for 2023, as compared to its previous revenues of $4.0 million for 2022.

Liability Repayment

Subsequent to December 31, 2023, the Company repaid in full all remaining principal and interest owed in connection with the prepaid advance liability.

Equity Financing

On September 15, 2023, the Company completed a public offering of 8,214,285 shares of common stock, priced at $0.35 per share, with gross proceeds of $2,875,000 less issuance costs of $588,230, for net proceeds of $2,286,770.

On December 22, 2023, the Company completed a public offering of 5,175,000 shares of common stock, priced at $0.20 per share, with gross proceeds of $1,035,000 less issuance costs of $257,800, for net proceeds of $777,200.

Issuance of Non-Convertible Series A Voting Preferred Stock

On January 26, 2024, the Board of Directors (“Board”) of the Company, following extensive strategic evaluation, including consultation with advisors, approved, authorized, and ratified the issuance of 730,000 shares of previously designated Non-convertible Series A Voting Preferred Stock to the Chairman and Chief Executive Officer of the Company, Michael Mo, subject to certain limitations as set forth below.

The issuance of up to 1,000,000 shares of Non-convertible Series A Voting Preferred Stock was previously approved and authorized by a vote of the majority stockholders of the Company.

The issuance is subject to the Board reserving the full and unequivocal right to revoke, rescind, transfer or otherwise cancel the issued Non-convertible Series A Voting Preferred Stock in the event Michael Mo is removed from any position with the Company or resigns from all positions with the Company.

This conditional arrangement is designed to ensure that the voting power conferred by the Non-convertible Series A Voting Preferred Stock remains tied to the active leadership of the Company.

This underscores the Board’s commitment to maintaining alignment with the long-term interests of the Company and its stockholders.

The Independent Members of the Board have determined that the issuance represents a pivotal strategic move to reinforce and enhance the Company’s flexibility to optimize the Company’s negotiating position in any potential current and/or future engagements with commercial, financial, and/or strategic parties, and to provide defenses against potential hostile third-party actions.

Appointment of Officers and Management

Appointment of Vice President, Sales

On January 16, 2023, the Company appointed a Vice President of Sales (the “VP of Sales”), and issued the VP of Sales 298,507 shares of restricted common stock.

The restricted common stock had a grant date fair value of $400,000, and vests in four equal annual installments beginning January 16, 2024 based solely on continued service.

The grant date fair value will be amortized ratably over the vesting period.

In addition, the Company committed to a one-year guaranteed commission of $200,000, payable in four quarterly installments as well as a severance package of $250,000 and one-year of family health insurance if the VP of Sales is terminated without cause (as defined) within one year of hire.

Appointment of Chief Financial Officer

On March 31, 2023, the Company appointed a Chief Financial Officer (the “CFO”) and issued the CFO 1,500,000 shares of restricted stock.

The restricted common stock had an aggregate grant date fair value of $1,380,000, and vests in five equal annual installments beginning March 31, 2024 based solely on continued service.

Management Equity Incentive Grants

On July 12, 2023, the Board unanimously approved an equity grant to the Chief Technology Officer, of 350,000 shares of restricted common stock.

The restricted common stock had a grant date fair value of $266,000 and vests in four equal annual installments beginning on July 12, 2024.

Merchant Cash Advance Agreement

On January 22, 2024, the Company entered into a merchant cash advance agreement (the “Cash Advance Agreement”) whereby the Company received $504,900 of cash (net of underwriting fees of $35,100) and paid finder’s fees in cash of $21,600 and finder’s fees to be issued in equity with an aggregate value of $16,200, with the obligation to repay a total of $804,600 over thirty-two weekly payments of $25,143.75, beginning January 30, 2024.

On February 26, 2024, the parties added an addendum to the agreement for an early payoff discount whereby the Company will owe $756,000 if paid by March 22, 2024, or $783,000 if paid by April 22, 2024.

On February 26, 2024, the Company entered into a merchant cash advance agreement (the “Second Cash Advance Agreement”) with the lender mentioned above, whereby the Company received $502,200 of cash (net of underwriting fees of $37,800) and paid finder’s fees in cash of $21,600 and finder’s fees to be issued in equity with an aggregate value of $16,200, with the obligation to repay a total of $804,600 over thirty weekly payments of $26,820, beginning February 29, 2024.

Recent Shareholder Vote by Majority Written Consent

On February 9, 2024, the shareholders of the Company, acted by way of majority written consent (in lieu of a special meeting of stockholders) to approve resolutions authorizing the Company’s Board of Directors to take the following actions:

(1) to issue shares of Common Stock to current or future engagements with commercial or strategic parties, which may result in issuances of over 20% of

the issued and outstanding shares of Common Stock;

(2) to amend the Company’s Bylaws to decrease the number of shares of Common Stock needed to establish a quorum for meetings of stock holders to thirty-three-and-one-third percent (33 1/3 %) of the outstanding voting securities of the Company;

(3) to amend the Certificate of Incorporation of the Company to effect a reverse split within a ratio range between 1-for-2 and 1-for-80;

(4) to issue shares of common stock, in connection with an existing financing facility, which may result in the potential issuance of over 20% of the issued and outstanding shares.

The resolution was approved by shareholders holding in aggregate of 55.72% of outstanding shares as of February 9, 2024.

Risks Associated with Ongoing Conflicts

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

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If the price of materials used in the manufacturing of our product candidates increase, that would adversely affect our business and the results of our operations.

New Officer Hires

On November 1, 2022, Dr.

William Walker was appointed as the new Chief Technology Officer.

Appointment of Lead Director

On November 1, 2022, our existing independent director, Dr.

Joanna Massey, was designated Lead Director of our Board.

Exercise of Warrants

During March 2022, the Company issued an aggregate of 70,143 shares of common stock upon the exercise of warrants pursuant to which the Company received an aggregate of $87,679 of gross proceeds.

During April 2022, the Company issued an aggregate of 2,346,525 shares of common stock upon the exercise of warrants pursuant to which the Company received an aggregate of $2,933,156 of gross proceeds.

Additionally, we do not have operations or material net sales in Israel or Gaza and we currently do not expect the recent hostilities in that region to have a material impact on our business.

We cannot predict how the events described above will evolve.

If the events continue for a significant period of time or expand to other countries, and depending on the ultimate outcomes of these conflicts, which remain uncertain, they could heighten certain risks disclosed in Item 1A in this Form 10-K, including, but not limited to, adverse effects on macroeconomic conditions, including increased inflation, constraints on the availability of commodities, supply chain disruption and decreased business spending;

cyber-incidents;

disruptions to our or our business partners’ global technology infrastructure, including through cyber-attack or cyber-intrusion;

adverse changes in international trade policies and relations;

claims, litigation and regulatory enforcement;

our ability to implement and execute our business strategy;

terrorist activities;

our exposure to foreign currency fluctuations;

reputational risk;

and constraints, volatility, or disruption in the capital markets, any of which could have a material adverse effect on our business, results of operations, cash flows and financial condition.

Executive Officers

Effective as of August 4, 2023, Dr.

Timothy Knowles resigned from the Board of Directors, as well as any other position that he occupied with the Company.

Consolidated Results of Operations

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For the Years Ended

Revenues Recognized at a Point in Time:

Product sales

Contract services

Total revenue

For the years ended December 31, 2022 and 2021, we generated $3,994,634 and $2,412,868 of revenues from 36 and 20 customers, respectively, representing an increase of $1,581,766, or 66%.

Revenue from product sales during the year ended December 31, 2022 increased by $1,147,997 or 77% compared to the year ended December 31, 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, thermal fiber thermal interface (“FTI”) materials and heatsink technology.

The increase in revenue from product sales for the year ended December 31, 2022 is primarily due to two contracts for custom TRS kits and heatsink technology which generated approximately $1,270,000 and $322,000 respectively, partially offset by a decrease attributable to contracts which generated approximately $485,000 for battery cells for the year ended December 31, 2021.

Revenues Recognized Over Time:

Contract services

Total Revenues

For the years ended December 31, 2023 and 2022, we generated $9,830,166 and $3,994,634 of revenue from 53 and 36 customers, respectively, representing an increase of $5,835,532, or 146%.

Revenue from product sales during the year ended December 31, 2023 increased by $4,260,663 or 161% compared to the year ended December 31, 2022, reflecting the growth in the number of customers of 39 in 2023 from 33 in 2022.

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 year ended December 31, 2023 increased by $1,574,869 or 117% compared to the year ended December 31, 2022.

The increase in revenue for the year ended December 31, 2022 is primarily due to three large contracts which generated approximately $1,272,000, partially offset by a decrease attributable to contracts which generated approximately $862,600

for the year ended December 31, 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.

The increase in revenue for the year ended December 31, 2023 is primarily due to growth in customers of 17 in 2023 from 14 in 2022.

This work includes unique engineering design and testing projects customized for specific customers.

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

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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.

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.

Cost of Revenue

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

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

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

For the years ended December 31, 2023 and 2022, cost of revenues was $6,164,310 and $1,630,527, respectively, representing an increase of $4,533,783, or 278%.

The increase was primarily due to increased costs as a result of increased revenues.

The gross margin percentage was 59% and 54% for the years ended December 31, 2022 and 2021, respectively.

The increase was primarily due to the increased number of customers and revenue during 2023, and the resultant cost increases from additional headcount and materials, and depreciation of automation equipment placed in service during 2023.

Additionally, there was a $0.3 million write down of our inventory to net realizable value.

The gross margin percentage was 37% in 2023, compared with 59% in 2022.

The margin on product sales was 26% and 44% for the years ended December 31, 2023 and 2022, respectively.

The margin on contract services was 63% and 89% for the years ended December 31, 2023 and 2022, respectively.

During the year ended December 31, 2023, the Company had depreciation expense for new automation equipment and increased costs related to finished goods manufactured internally.

In addition, the Company recorded an inventory write down that represented 2% of the related revenue.

Research and Development

Research and development (“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution, high-areal-capacity battery electrodes, 3D engineering for a rechargeable battery and non-cash stock-based compensation expenses.

Research and development (“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution, high-areal-capacity battery electrodes, and 3D engineering for a rechargeable battery, including non-cash stock-based compensation expenses.

Research and development expenses are charged to operations as incurred.

For the years ended December 31, 2023 and 2022, R&D expenses were $6,195,400 and $4,196,313, respectively, representing an increase of $1,999,087 or 48%.

The increase is primarily comprised of $1,337,351 related to planned increases in headcount in order to build future capacity, and $978,029 related to new R&D initiatives designed to build future revenue growth.

The increase is primarily comprised of $1,980,948 related to planned increases in headcount in order to build future capacity, amortization of prepaid cash consideration related to the Vibetech asset purchase agreement of $375,000, stock-based compensation for equity awards of $142,684 and rent expense of $79,831 for a new facility for R&D initiatives designed to build future revenue growth, partially offset by a reduction in outsourced R&D costs of $649,492.

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, marketing and advertising, salaries, payroll taxes and other benefits, accounting and tax, consulting fees, travel and entertainment, rent expense, office expenses, and legal and professional fees.

Selling, general and administrative expenses consisted primarily of stock-based compensation, marketing and advertising, salaries, payroll taxes and other benefits, Board compensation, accounting and tax, consulting fees, travel and entertainment, rent expense, office expenses, and legal and professional fees.

For the years ended December 31, 2023 and 2022, selling, general and administrative expenses were $19,882,402 and $16,453,776, respectively, an increase of $3,428,626, or 21%.

This increase is primarily due to an increase in employee related costs to build future capacity for planned revenue growth of $2,484,407, marketing and advertising expenses of $1,500,371, travel expenses primarily related to customer and vendor relations of $484,214, NetSuite implementation costs of $390,000, and $315,773 of SEC filing fees and professional services.

The increase is primarily due to increases in labor costs of $1,564,020, depreciation and amortization expense of $1,512,509 due to expansion of our facility and equipment placed in service during 2023, consulting fees to build future revenue growth of $546,880, software license and utility fees of $350,689, and costs to attend conferences and seminars of $119,897, partially offset by a decrease in stock-based compensation of $814,965.

Other (Expense) Income

For the years ended December 31, 2023 and 2022, other expenses, net, were $1,281,610 and $1,150,497, respectively, representing an increase of $131,113 or 11%.

The increase is primarily attributable to the increase in interest expense recorded in connection with notes payable and the Prepaid Advance of $932,538, an increase in the related amortization of debt discount of $383,627, and the loss on debt extinguishment of $8,508, partially offset by a $272,856 increase in the change in fair value of accrued issuable equity, $158,675 gain on forgiveness of PPP loan and interest, and a decrease of debt redemption costs of $140,000.

The increase is primarily attributable to an increase in the amortization of debt discount

of $218,405 associated with the prepaid advance liability, and a $158,675 decline in PPP loan forgiveness, partially offset by a $217,454 decrease in a cash repayment premium recorded in satisfaction of a note payable in September 2022.

Liquidity and Capital Resources

As of December 31, 2022 and 2021, we had cash balances of $10,333,563 and $14,863,301, respectively, and working capital of $6,055,477 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 a 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, (each, a “Prepaid Advance”), 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.

On September 23, 2022, the Company received proceeds from a Prepaid Advance in the amount of $15,000,000 (“the Initial Prepaid Advance”), of which, $3,850,000 and $566,932 was withheld to repay the Promissory Note and related interest and premiums owed to Yorkville.

During September through December 2022, the Company issued 5,375,269 shares of common stock, at purchase prices per share ranging from $0.99 to $1.84 pursuant to Investor Notices, in satisfaction of the Initial Prepaid Advance liability in the amount of $6,000,000.

As of March 28, 2023, the remaining balance on the initial Prepaid Advance is $5,750,000.

See Note 10 - Prepaid Advance Liability in the accompanying consolidated financial statements for additional information.

As of December 31, 2023 and 2022, we had cash balances of $1,194,764 and $10,333,563, respectively, and working capital (deficit) of $(2,994,753) and $6,055,477, respectively.

For the years ended December 31, 2023 and 2022, cash used in operating activities was $11,965,388 and $17,354,125, respectively.

Our cash used in operations for the year ended December 31, 2023 was primarily attributable to our net loss of $23,693,556, adjusted for non-cash expenses in the aggregate amount of $6,841,828, as well as $4,886,340 of net cash generated by changes in the levels of operating assets and liabilities.

Our cash used in operations for the year ended December 31, 2022 was primarily attributable to our net loss of $19,436,479, adjusted for non-cash expenses in the aggregate amount of $5,434,100, as well as $3,351,746 of net cash used to fund changes in the levels of operating assets and liabilities.

Our cash used in operations for the year ended December 31, 2021 was primarily attributable to our net loss of $11,911,151, adjusted for non-cash expenses in the aggregate amount of $4,670,955, as well as $434,522 of net cash generated from changes in the levels of operating assets and liabilities.

For the years ended December 31, 2023 and 2022, cash used in investing activities was $1,046,113 and $4,647,974, respectively.

Cash used in investing activities during the year ended December 31, 2022 was related to deposits paid for equipment of $1,421,432, purchases of property and equipment of $2,682,970, and the purchase of intangible assets for $543,572.

Cash used in investing activities during the year ended December 31, 2021 was related to deposits paid for equipment of $2,153,950, purchases of property and equipment of $383,285, and the purchase of an intangible asset for $200,000.

Cash used in investing activities during the year ended December 31, 2023 was related to deposits paid for purchases of property and equipment of $644,963, purchases of property and equipment of $266,150, and an acquisition of intangible assets of $135,000.

Cash used in investing activities during the year ended December 31, 2022 was related to purchases of property and equipment of $2,682,970, deposits paid for purchases of property and equipment of $1,421,432 and acquisition of intangible assets of $543,572.

For the years ended December 31, 2023 and 2022, cash provided by financing activities was $3,872,702 and $17,472,361, respectively.

Cash provided by financing activities during the year ended December 31, 2022 was due to net 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 $250,000, proceeds from the exercise of options of $53,457.

These amounts were 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, 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 year ended December 31, 2021 resulted from proceeds from the exercise of warrants in the amount of $11,719,204, proceeds from the sale of Series D Convertible Preferred Stock and warrants of $6,500,000, and proceeds from the exercise of options of $121,866.

These amounts were partially offset by repayments of notes payable of $2,450,000, and payment of financing costs of $365,000.

As of December 31, 2022, future cash requirements for our current liabilities include $3,550,294 for accounts payable and accrued expenses and $223,645 for future payments under operating leases.

The Company has also committed to spend $1,000,000 related to the asset purchase agreement, $825,000 related to sponsorship agreements, $889,171 related to capital expenditures for automation and testing equipment, $391,842 for research and development, and $201,867 for construction related to facility enhancements.

In addition, the Company committed to pay nonrefundable license fees and a minimum royalty of $67,500.

Future cash commitments for long term liabilities consists of $97,958 for the long-term lease and a minimum royalty payment of $27,500.

As of December 31, 2022, the Company also had $9,000,000 of principal outstanding for a prepaid advance liability pursuant to the Supplemental SEPA.

Subsequent to December 31, 2022, the Company issued 2,839,217 shares of common stock in settlement of $3,000,000 of the Prepaid Advance.

As of the filing date of this Form 10-K, the principal balance due on the Prepaid Advance is $6,000,000.

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.

Financing activities during the year ended December 31, 2023 consisted primarily of $3,227,702 for equity financing, net of issuance costs and the repurchase of common stock, $2,220,000 for debt financing, net of issuance costs and $1,575,000 for debt repayments.

Financing activities for the year ended December 31, 2022 consisted primarily of $15,220,868 for debt financing, net of issuance costs, $3,074,293 for the exercise of warrants and stock options, $1,000,000 for debt repayments and $177,200 for equity financing.

As of December 31, 2023, future cash requirements for our current liabilities include $6,232,888 for accounts payable and accrued expenses, $1,609,200 for merchant cash advances, $1,323,963 for capital expenditures and $102,186 for future payments under operating leases.

Future cash requirements for long-term liabilities include $250,000 for promissory notes.

These factors raise substantial doubt about the Company’s ability to meet its obligations as they become due within the twelve months from the date these consolidated financial statements are issued.

Subsequent to December 31, 2023, the Company repaid in full the remaining balance of the prepaid advance liability, classified in the non-current liabilities section of our consolidated balance sheets.

As of the filing date of this Form 10-K, there is no balance due on the prepaid advance.

We intend to meet the rest of these cash requirements from our current cash balance, proceeds from the SEPA, proceeds from future financing activities and from future revenues, but the Company can provide no assurance that these initiatives will be successful.

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 substantial doubt about our ability to continue as

a going concern could exist 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 as evidenced by the funds provided during March 2023.

On March 10, 2023, the Company and Yorkville closed on a second Prepaid Advance in the amount of $2,000,000.

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 March 24, 2023, our cash balance was approximately $7.3 million.

We have a history of recurring net losses, recurring use of cash in operations and declining working capital.

On December 20, 2023, we received a Stockholders’ Equity Notice stating we are not in compliance with Section 1003(a)(iii) of the Company Guide since we reported stockholders’ equity of $1,200,172 at September 30, 2023, and losses from continuing operations and/or net losses in our five most recent fiscal years.

On February 12, 2024, we received a Letter from NYSE stating we are not in compliance with Section 1003(f)(v) of the Company guide since our securities were trading at an average of less than $0.20 per share for 30 days.

Subsequent to December 31, 2023, the Company issued 40,276,430 shares of common stock, at purchase prices per share ranging from $0.13 to $0.41, pursuant to Advance Notices submitted by the Company to Yorkville for aggregate proceeds of $8,326,457.

Of the gross proceeds, $2,610,650 was retained by the Company to help fund operations.

The remaining proceeds were applied against the remaining principal and accrued interest owed in connection with the Prepaid Advance Liability.

During the first quarter of 2024, the Company entered into two agreements whereby the Company received $1,007,100 of cash (net of underwriting fees of $72,900) with the obligation to repay a total of $1,609,200 over a total of thirty-two weekly payments.

See Note 18 – Subsequent Events – Merchant Cash Advance Agreement for additional details.

On January 9, 2024, the Company announced that it had completed a reduction of its total workforce of approximately 15% in an effort to allocate its resources to key business priorities to focus on improving the profitability of commercial customer engagements.

On April 2, 2024, the Company received cash proceeds of $440,000 related to a Promissory Note comprised of an initial principal amount of $500,000 and discount of $60,000.

The Promissory Note carries an annual interest rate of 0% and increases to 15% in the event of default, and shall be repaid in cash representing all outstanding principal and accrued and unpaid interest due on October 2, 2024, as defined by the terms of the agreement.

See Note 18 – Subsequent Events – Promissory Notes for additional information.

On April 9, 2024, the Company received cash proceeds of $200,000 related to a Promissory Note which matures on the first anniversary of its issuance and carries an annual interest rate of 16%.

In the event the promissory note is prepaid within 9 months of its issuance, the holder is entitled to the repayment of principal and cash payment of interest equal to 12% of the prepayment amount.

See Note 18 – Subsequent Events – Promissory Notes for additional information.

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

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There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures must be in conformity with U.S.

These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented.

We believe that the estimates and judgments upon which these reported amounts rely are reasonable based upon information available to us at the time that we make these estimates and judgments.

Significant estimates used in these financial statements include, but are not limited to, assumptions used in projecting future cash flows and liquidity, fair value calculations for intangible assets, equity securities, stock-based compensation and the valuation allowance related to deferred tax assets.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S.

generally accepted accounting principles, which require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods.

To the extent that there are material differences between these estimates and actual results, our financial results will be affected.

Certain estimates could be affected by external conditions, including those unique to the Company as well as general economic conditions.

The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below.

The following is not intended to be a comprehensive list of all of our accounting policies or estimates.

Our accounting policies are more fully described in Note 2 – Summary of Significant Accounting Policies, in our financial statements included at the end of this Annual Report.

Revenue Recognition

Revenues are recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

We recognize revenues following the five-step model in accordance with ASC 606, Revenue from Contracts with Customers:

(i) identify contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenues when (or as) we satisfy the performance obligation.

The timing of our revenue recognition may differ from the timing of payment by our customers.

A receivable is recorded when revenue is recognized prior to payment, and we have an unconditional right to payment.

Alternatively, we record deferred revenue when payment is received from customers for which the Company had not yet satisfied its performance obligation under the contract, or the customers have not officially accepted the goods or services provided under the contract.

Asset Acquisition

In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets.

If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business and is instead deemed to be an asset.

An asset acquisition is recorded at cost, which includes capitalizing transaction costs, and does not result in the recognition of goodwill.

Stock-Based Compensation

We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant.

The fair value amount of the shares expected to ultimately vest is then recognized over the period for which services are required to be provided in exchange for the award, usually the vesting period.

The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period that the estimates are revised.

We account for forfeitures as they occur.

We consider an accounting estimate to be critical if:

(i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

There are items within our financial statements that require estimation but are not deemed critical, as defined above.

Recently Issued Accounting Pronouncements

See Note 2 – Summary of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for a summary of recently issued and adopted accounting pronouncements.

See Note 2 – Summary of Significant Accounting Policies of our consolidated financial statements included within Item 8 of this Annual Report for a summary of recently issued and adopted accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis