What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-14 · 166 added, 91 removed, 66 unchanged (80% 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 September 30, 2023 and for the three and nine months ended September 30, 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.

(“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of March 31, 2024 and for the three months ended March 31, 2024 and March 31, 2023 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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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, except as disclosed elsewhere in this Quarterly Report.

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

This energy management platform consists of high-performance thermal management technologies for batteries and electronics, AI-powered battery management and vibration mitigation software solutions, and reusable energy storage modules.

Our mission is advance and apply these technologies to make our world more sustainable by using less energy;

Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on April 12, 2024, unless disclosed elsewhere in this Quarterly Report.

KULR Technology Group, Inc., through our wholly owned subsidiary KULR Technology Corporation, maintains expertise in three key technology domain areas:

(1) energy storage systems and recycling, (2) thermal management solutions, and (3) rotary system vibration reduction.

Historically, KULR, focused on thermal energy management solutions for space and Department of Defense (DoD) applications, with recent expansion into energy storage and vibration reduction markets as the logical next step.

Combined, this energy management platform consists of high-performance thermal management technologies for batteries and electronics, AI-powered battery management and vibration mitigation software solutions, and reusable energy storage modules.

Our mission is to advance and apply these technologies to make our world more sustainable by using less energy;

using energy more efficiently;

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and completing the circular economy through recycling.

Active government initiatives propelled by industry and regulatory tailwinds are increasing demand for energy storage, battery recycling and clean energy, resulting in an expanding total addressable market for KULR’s solutions.

According to Precedence Research, global energy storage systems market is to grow from $210B in 2021 to $435B by 2030.

Global lithium-ion battery recycling industry is to grow from $4.6B in 2021 to $22.8B by 2030, according to Market and Markets Research.

Additionally, the domain driving the growth of KULR’s battery design and production capabilities is the private space exploration market sector, which requires highly custom, safe, and reliable energy storage systems, and is expected to reach $1,110.8B by 2030 according to CoherentMI.

The Company’s disruptive technologies strive to fulfill an addressable $24 billion thermal management systems market (estimated based on market data projections published by Converged Markets stating that the thermal management systems market size was projected to grow to $24.8 billion by 2025).

E-aviation growth and continued reliance on traditional aviation vehicles drives an aircraft maintenance market size that is expected to reach $127.2B by 2032, an increase from $82.7B in 2023, according to Precedence Research.

KULR VIBE, the Company’s rotary system vibration reduction software, positions KULR to access this market area.

As companies and governments around the world pledge to meet net zero emissions over the next few decades, KULR is uniquely positioned to accelerate the adoption of clean energy solutions and sustainable products and facilitate the migration to a global circular economy.

The Company’s goal is to provide total battery safety solutions for more efficient battery systems, increased sustainability, and end-of-life battery management, making KULR a key technology solutions provider in the migration to a global circular economy.

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.

KULR’s primary technical domain that is shaping the future landscape of the Company is safe, high-performance energy storage solutions.

To effectively support and provide energy storage solutions, a holistic approach is necessary.

Batteries are an interdisciplinary technology which require:

(1) Multi-disciplinary expertise to address related electrical, thermal, mechanical, and electrochemical requirements,

(2) Cell supply access to top-tier OEMs,

(3) Cell level testing capabilities to characterize performance, quality, and safety behavior at the cell level,

(4) Expertise in early concept design, modeling, and analysis,

(5) Rapid prototyping and production capabilities,

(6) Pack and system level thermal, mechanical, electrical, and abuse testing capabilities,

(7) Expertise in battery management, controls, and monitoring,

(8) Ability to support beginning of life to end of life requirements for transport and recycling.

To address the need for a holistic approach, KULR developed a battery product and service portfolio over the course of the last decade that provides products, safety testing services, modeling and analysis services, electrical testing services, transport and recycling packaging and logistics, and battery design solutions.

Collectively, this is referred to as KULR ONE Design Solutions (K1-DS), which is actively leveraged by the Company to facilitate engagement with customers no matter the battery life cycle phase they are in.

Currently, the primary aspects of K1-DS utilized by industry are product sales of trigger cells and TRS, the safety testing methodologies, and the utilization of the K1-DS platform as a whole to develop customized energy storage solutions.

Internally, KULR has leveraged K1-DS to develop off the shelf KULR ONE architecture which represents 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.

As of now, the Company is focused on the KULR ONE Space for space exploration, the KULR ONE Guardian for military applications, and the KULR ONE Max for rack-style grid energy storage systems, also referred to as Battery Energy Storage Systems (BESS).

These architectures collectively 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 the modularity and consistency of the architectures.

This allows for greater flexibility as customers can easily adjust the size and configuration of the battery pack to suit their specific application requirements while still also benefitting from testing previously conducted by the KULR team for their specific architecture.

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.

Overall, the KULR ONE family of battery packs, depicted with the following picture, 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 TM battery management system.

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

KULR VIBE Solution

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The KULR VIBE suite of products and services have provided vibration analysis and mitigation to global companies across multiple industries and sectors.

According to Fact.MR, an insights-driven global market intelligence company, the global vibration motor market is estimated at $6.5 billion in 2023 and is forecast to reach $24.1 billion by 2032, growing at a Compounded Annual Growth Rate (“CAGR”) of 14.1% during 2023-2032.

According to Fact.MR, an insights-driven global market intelligence company, the global vibration motor market is forecasted to reach $24.1 billion by 2032.

The Future is Energy + AI

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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.

As the world faces shortages of both technical expertise to design batteries and raw materials to build batteries, KULR aims to address this need with KULR ONE AI (K1AI).

The Company is collecting large quantities of performance and safety test datasets for the most highly used commercial lithium-ion cells and combining that data with AI techniques to drive battery design and reduce engineering touch time to market.

This product is to target the following markets:

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Recent Developments

Quarterly Revenues

The Company reported its fifth consecutive quarter of increasing trailing twelve months revenues.

Trailing twelve months revenues were $9,897,265 for the twelve months ended September 30, 2023.

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.

See Note 13 – Stockholders’ Equity – Common Stock for further details.

Liability Repayment

On September 18, 2023, the Company repaid an aggregate amount of $1,839,731, consisting of a principal amount of $1,500,000, accrued interest in the amount of $264,731 and a payment premium in the amount of $75,000.

See Note 9 - Prepaid Advance Liability for further details.

During the three months ended March 31, 2024, the Company issued 41,027,591 shares of common stock pursuant to SEPA Advance Notices submitted by the Company to Yorkville for aggregate proceeds of $8,979,058.

Of the gross proceeds, $2,910,651 was retained by the Company to fund operations.

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

The Prepaid Advance Liability and the related accrued interest has been repaid in full during the first quarter of 2024.

Standby Equity Purchase Agreement (“SEPA”)

Subsequent to March 31, 2024, and through May 13, 2024, the Company issued a total of 9,453,767 shares of common stock pursuant to SEPA Advance Notices submitted by the Company to Yorkville for aggregate proceeds of $4,321,479.

Merchant Cash Advance Agreement

On January 22, 2024, the Company entered into a merchant cash advance agreement (the “Cash Advance Agreement”) with a lender, pursuant to which Cash Advance Agreement the Company agreed to sell, and the lender agreed to purchase, the Company’s right, title and interest in and to $804,600 of the Company’s accounts receivables, for a purchase price of $504,900.

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.

The Cash Advance Agreement is secured by the Company’s accounts receivable and related cash receipts.

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.

The Company did not take advantage of the early payoff discount and will resume making weekly payments over the original thirty-two week term.

On February 26, 2024, the Company entered into a merchant cash advance agreement (the “Second Cash Advance Agreement”) with the lender mentioned above, pursuant to which Second Cash Advance Agreement the Company agreed to sell, and the lender agreed to purchase, the Company’s right, title and interest in and to $804,600 of the Company’s accounts receivables, for a purchase price of $502,200.

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.

The Second Cash Advance Agreement is secured by the Company’s accounts receivable and related cash receipts.

Promissory Notes

On April 2, 2024, the Company entered into an agreement (the “Promissory Note”), with a lender (the “Lender”), pursuant to which the Lender purchased an unsecured promissory note with an initial principal amount of $500,000.

The Company received cash proceeds of $440,000, resulting in a discount of $60,000, made up of an original issue discount of $50,000 and debt issuance costs of $10,000.

The Promissory Note carries an annual interest rate of 0%, which shall increase to 15% in the event of default, and has a maturity date of October 2, 2024, after which all outstanding principal and accrued interest will become immediately due.

On April 9, 2024, the Company entered into a note purchase agreement pursuant to which the Company issued an unsecured promissory note with an initial principal amount of $200,000 and which matures on the first anniversary of its issuance.

The Company received cash proceeds of $200,000.

The promissory note 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.

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 of the 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.

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, which the Company has not taken the required action to effect this reverse split;

(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 approximately in aggregate of 55.72% of ownership percentage of the voting stock 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.

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 product candidates.

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.

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 our Annual Report on Form 10-K which was filed with the SEC on April 12, 2024, 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.

Compliance with NYSE American Continued Listing Requirements

On December 20, 2023, the Company received a notice of noncompliance (the “Stockholders’ Equity Notice”) from NYSE Regulation (“NYSE”) stating that it is not in compliance with Section 1003(a) (i) in the NYSE American Company Guide (the “Company Guide”) since the Company reported stockholders’ equity of $1,200,172 on September 30, 2023, and losses from continuing operations and/or net losses in its five most recent fiscal years.

Section 1003(a) (iii) of the Company Guide requires a listed company to have stockholders’ equity of $6 million or more if the listed company has reported losses from continuing operations and/or net losses in its five most recent fiscal years.

As required by the Stockholders’ Equity Notice, on January 19, 2024, the Company submitted a plan (the “Plan”) to NYSE advising of actions it has taken or will take to regain compliance with the continued listing standards by June 20, 2025.

NYSE staff will review the Company periodically for compliance with the initiatives outlined in the Plan.

If the Company is not in compliance with the continued listing standards by June 20, 2025, or if the Company does not make progress consistent with the Plan during the Plan period, NYSE staff will initiate delisting proceedings as appropriate.

On March 5, 2024, the Company received a notification from the NYSE that the Company’s plan to regain compliance with Section 1003 (a) (iii) of the Company Guide was accepted and so long as the Company meets its interim objectives, the Company will have until June 20, 2025, to regain compliance with the minimum stockholders’ equity requirement.

On February 12, 2024, the Company received an additional notice letter from NYSE stating that it is not in compliance with Section 1003(f)(v) of the Company Guide since the Company’s securities were trading at an average of less than $0.20 per share for 30 days.

However, on May 1, 2024, the Company received a notification from the NYSE stating that the Company had regained compliance with Section 1003 (f) (v) of the Company Guide given the increase in the trading price of the Company’s securities.

Results of Operations

Three and Nine Months Ended September 30, 2023 Compared With Three and Nine Months Ended September 30, 2022

Three Months Ended March 31, 2024, Compared With Three Months Ended March 31, 2023

Our revenues consisted of the following contract 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, 2023 and 2022, we generated $3,041,007 and $1,393,185 of revenues from 18 and 16 customers, respectively, representing an increase of $1,647,822, or 118%.

For the nine months ended September 30, 2023 and 2022, we generated $7,496,315 and $2,181,230 of revenues from 37 and 29 customers, respectively, representing an increase of $5,315,085, or 244%.

Revenue from product sales during the three months ended September 30, 2023 increased by $526,613 or 38% compared to the three months ended September 30, 2022.

Revenue from product sales during the nine months ended September 30, 2023 increased by $3,382,978 or 161% compared to the nine months ended September 30, 2022.

The increase in product sales during the three and nine months ended September 30, 2023, was primarily due to a significant increase in sales of patented Thermal Runway Shield (“TRS”) technology.

Product sales also included sales of our component product and internal short circuit (“ISC”) battery cells and devices.

Revenue from contract services during the three months ended September 30, 2023 increased by $1,121,209 compared to the three months ended September 30, 2022.

Revenue from contract services during the nine months ended September 30, 2023 increased by $1,932,107 or 2382% compared to the nine months ended September 30, 2022.

Two contracts received during the nine months of 2023 generated $975,270 of contract service revenues.

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

For the three months ended March 31, 2024 and 2023, we generated $1,749,104 and $1,759,802 of revenues from 34 and 15 customers, respectively.

Revenue from product sales during the three months ended March 31, 2024, decreased by $1,014,165 or 62% compared to the three months ended March 31, 2023.

Product sales include the sales of our component product, internal short circuit (“ISC”) battery cells and devices, and patented TRS technology.

We had 25 product sales customers in the first quarter of 2024, compared with 13 in the first quarter of 2023.

The decline in product sales can be attributed to several expected first half 2024 orders, which management now expects to receive in the second half of 2024.

Revenue from contract services during the three months ended March 31, 2024, increased by $1,003,467 or 769% compared to the three months ended March 31, 2023.

Service revenues include certain research and development contracts and onsite engineering services.

We had 14 contract services customers in the first quarter of 2024, compared with 5 in the first quarter of 2023.

Four large contracts received during the first quarter of 2024 generated $328,000 of service revenues, while $461,000 of service revenues deferred at December 31, 2023, were recognized in the quarter.

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, providing contract services, 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 and overhead expenses directly related to product sales and research contract services.

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

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 Revenue and Gross Profit

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.

Also, 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 three months ended September 30, 2023 and 2022, cost of revenue was $1,703,553 and $932,364, respectively, representing an increase of $771,189, or 83%.

The increase corresponds to the increase in our revenue during the period.

The gross margin percentage was 44% and 33% for the three months ended September 30, 2023 and 2022, respectively.

The gross margin percentage increased due to the increase in higher margin revenue from contract services.

For the nine months ended September 30, 2023 and 2022, cost of revenue was $4,513,285 and $1,478,954, respectively, representing an increase of $3,034,331, or 205%.

The increase corresponds to the increase in our revenue during the period.

The gross margin percentage was 40% and 32% for the nine months ended September 30, 2023 and 2022, respectively.

The gross margin percentage increased due to the increase in higher margin revenue from contract services.

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 three months ended March 31, 2024 and 2023, cost of revenues was $1,238,315 and $1,116,414, respectively, representing an increase of $121,901 or 11%.

For the three months ended March 31, 2024 and 2023, gross profit was $510,789 and $643,388, respectively, a decline of $132,599 or 21%, which represented gross profit margins of 29% and 37%, respectively.

The decrease in the

current period profit margin was primarily due to (a) approximately $250,000 of labor and materials costs in the current period associated with a specific project which had no corresponding current period revenue;

and (b) an approximately $167,000 increase in quarterly depreciation expense for revenue generating equipment that was put in service in the last month of the quarter ended March 31, 2023.

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 related 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 three months ended September 30, 2023 and 2022, R&D expenses were $1,640,959 and $1,069,852, respectively, representing an increase of $571,107, or 53%.

The increase during 2023 was comprised primarily of $515,634 related to planned increases in headcount in order to build future capacity, and $28,380 related to an increase in employee stock-based compensation for option awards.

For the nine months ended September 30, 2023 and 2022, R&D expenses were $4,873,841 and $2,790,683, respectively, representing an increase of $2,083,158 or 75%.

The increase during 2023 was comprised primarily of $1,604,843 related to planned increases in headcount in order to build future capacity, amortization of prepaid cash consideration for Vibetech asset purchase agreement of $375,000, equity compensation for Vibetech asset purchase agreement of $128,650, rent expense of $42,948 for a new facility for R&D initiatives designed to build future revenue growth and $40,482 for depreciation expense, partially offset by a reduction in outsourced R&D costs.

We expect that our R&D expenses will increase as we expand our future operations, presuming that we raise adequate capital to do so.

For the three months ended March 31, 2024 and 2023, R&D expenses were $954,625 and $1,805,015, respectively, representing a decrease of $850,390 or 47%.

The decrease was comprised primarily of $429,263 of labor costs allocated to cost of revenue in 1Q24 due to the increase in service revenue, $390,714 related to a planned decrease in R&D consulting services to conserve cash, partially offset by an increase in building related expenses of approximately $50,000 for the facility in Texas.

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

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, 2023 and 2022, selling, general and administrative expenses were $4,793,523 and $4,349,373, respectively, an increase of $444,150, or 10%.

The increase is primarily due to increases in depreciation and amortization expense of $486,724 primarily due to enhancements to our primary facility, labor costs of $240,766, various legal and professional fees of $107,912, software license and utility fees of $78,703, board compensation fees of $61,250, insurance fees of $50,044, franchise tax of $32,342, and office related expenses due to the increase in headcount of $21,997, partially offset by a decrease in marketing and advertising expenses of $416,140, and a decrease of $252,557 in stock-based compensation.

For the nine months ended September 30, 2023 and 2022, selling, general and administrative expenses were $15,546,915 and $12,210,458, respectively, an increase of $3,336,457, or 27%.

The increase is primarily due to increases in labor costs of $1,279,768, depreciation and amortization expense of $1,086,541, consulting fees of $837,758, travel and entertainment costs to build future revenue growth of $218,348, software license and utility fees of $265,030, and costs to attend conferences and seminars of $152,888, partially offset by decreases in stock-based compensation of $793,866.

Other Expense

For the three months ended September 30, 2023 and 2022, net other expense was $465,246 and $628,181, respectively, representing a decrease of $162,935, or 26%.

The change is primarily attributable to a $383,276 decline in interest expense primarily related to a note payable that was paid in 2022 and $158,675 decline in PPP loan forgiveness.

For the nine months ended September 30, 2023 and 2022, net other expense was $1,062,401 and $678,960, respectively, representing an increase of $383,441, or 56%.

The change is primarily attributable to a $383,441 increase in interest expense primarily related to the prepaid advance liability that was entered into in September 2022, partially offset by a $158,675 decline in PPP loan forgiveness.

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 three months ended March 31, 2024 and 2023, selling, general and administrative expenses were $4,212,898 and $5,099,091, respectively, representing a decrease of $886,193 or 17%.

The decrease is primarily due to a planned decrease in outsourced services of $575,158, a decrease in conferences and seminars of $127,835 and a decrease of $95,889 for stock-based compensation.

Other Income (Expense)

For the three months ended March 31, 2024 and 2023, other expense was $352,142 and $342,143, respectively, representing a decrease of $9,999, or 3%.

The change is primarily attributable to a decrease of $71,240 for amortization of debt discount in connection with the Prepaid Advance, a decrease of $27,229 for interest recorded in connection with the Prepaid Advance Liability, partially offset by an increase in the change in fair value of accrued issuable equity of $77,110 and an increase of $31,358 due to a 2023 loss on debt extinguishment related to the Prepaid Advance Liability.

Liquidity and Capital Resources

As of September 30, 2023 and December 31, 2022, we had cash balances of $1,167,315 and $10,333,563, respectively, and working capital (deficit) of $(6,355,104) and $6,055,477, respectively.

For the nine months ended September 30, 2023 and 2022, cash used in operating activities was $10,893,050 and $13,366,007, respectively.

Our cash used in operations for the nine months ended September 30, 2023 was primarily attributable to our net loss of $18,500,127, adjusted for non-cash expenses in the aggregate amount of $4,968,456, as well as $2,638,621 of net cash provided by changes in the levels of operating assets and liabilities.

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, and $2,460,920 of net cash used to fund changes in the levels of operating assets and liabilities.

For the nine months ended September 30, 2023 and 2022, cash used in investing activities was $993,699 and $2,772,568, respectively.

Cash used in investing activities during the nine months ended September 30, 2023 was related to deposits paid for purchases of property and equipment of $621,107, purchases of property and equipment of $237,592, and an acquisition of intangible assets of $135,000.

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.

For the nine months ended September 30, 2023 and 2022, cash provided by financing activities was $2,720,501 and $17,444,137, respectively.

Cash provided by financing activities during the nine months ended September 30, 2023 was due to the proceeds from a public offering of $2,875,000 and a second Prepaid Advance of $2,000,000, partially offset by repayments of the Prepaid Advance of $1,575,000, payments of issuance costs in connection with the public offering of $320,250, repurchases of common stock of $229,249, and financing costs related to the SEPA of $30,000.

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, financing costs related to the SEPA for $72,800 and payments of issuance costs in connection with notes payable for $17,200.

Future cash requirements for our current liabilities include $5,971,238 for Prepaid Advances, $4,831,517 for accounts payable and accrued expenses and $172,569 for future payments under operating leases.

The Company has also committed to spend $809,379 related to capital expenditures for automation equipment, and $500,000 in connection with an asset purchase agreement.

There are no cash requirements for long-term liabilities as of September 30, 2023.

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

As of March 31, 2024 and December 2023, we had cash balances of $798,843 and $1,194,764, respectively, and a working capital deficit of $3,907,626 and $2,994,753, respectively.

For the three months ended March 31, 2024 and 2023, net cash used in operating activities was $3,907,406 and $4,759,039, respectively.

Our net cash used in operations for the three months ended March 31, 2024, was primarily attributable to our net loss of $5,008,876, adjusted for non-cash expenses in the aggregate amount of $1,853,354, plus $751,884 of net cash used to fund changes in the levels of operating assets and liabilities.

Our net 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, partially offset by $429,799 of net cash generated by changes in the levels of operating assets and liabilities.

For the three months ended March 31, 2024 and 2023, net cash used in investing activities was $13,400 and $358,490, respectively.

Net cash used in investing activities during the three months ended March 31, 2024, was related to purchases of property and equipment.

Net cash used in investing activities during the three months ended March 31, 2023, was related to purchases of property and equipment, and the acquisition of an intangible asset.

For the three months ended March 31, 2024 and 2023, net cash provided by financing activities was $3,524,885 and $1,970,000, respectively.

Net cash provided by financing activities during the three months ended March 31, 2024, was due to proceeds from SEPA Advance Notices totaling $2,910,651, and net proceeds from notes payable totaling $963,900, partially offset by notes payable

repayments of $349,666.

Net cash provided by financing activities during the three months ended March 31, 2023, was due to net proceeds from the prepaid advance liability of $1,970,000.

Future cash requirements for our current liabilities include approximately $5.8 million for accounts payable and accrued expenses, $1,259,534 for notes payable, and $435,707 for operating leases.

The Company has also committed to spend $981,371 related to capital expenditures for automation equipment.

Future cash requirements for long-term liabilities as of March 31, 2024, include $250,000 for notes payable, and $1,188,259 for operating leases.

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

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

On September 18, 2023, the Company paid an aggregate of $1,839,731 owed in connection with our prepaid advance liability consisting of $1,500,000 of principal, $264,731 of interest and $75,000 of payment premium costs.

Pursuant to the amendment dated November 7, 2023, three additional payments consisting of $1,500,000, $2,000,000, and remaining principal of $2,471,238 and premium costs thereafter will be due on December 31, 2023, January 31, 2024, and March 1, 2024, respectively.

As of the date of these financial statements, we have no commitments to obtain additional funding.

These factors raise substantial doubt about our ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that may be necessary should we be unable to continue as a going concern.

Our continuance as a going concern is dependent upon our ability to obtain additional operating capital and ultimately achieve revenue growth and attain profitability.

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.

On May 1, 2024, the Company received a notification from the NYSE stating that the Company had regained compliance with Section 1003 (f) (v) of the Company Guide given the increase in the trading price of the Company’s securities.

On April 2, 2024, the Company received cash proceeds of $440,000 related to an unsecured 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 has a maturity date of October 2, 2024.

See Note 14 – Subsequent Events – for additional information.

On April 9, 2024, the Company received cash proceeds of $200,000 related to an unsecured 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 14 – Subsequent Events – for additional information.

As of the date of the issuance of these consolidated financial statements, the Company has no additional commitments to obtain additional funding through future debt or equity financings, or that the Company will be able to obtain additional funds on commercially acceptable terms, if at all.

There is no assurance that the amount of funds the Company might raise will enable the Company to complete its development initiatives or attain profitable operations.

The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.

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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Critical Accounting Estimates

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

See Note 2 – Summary of Significant Accounting Policies of our unaudited condensed consolidated financial statements included within this Quarterly Report for a summary of recently issued but not yet effective accounting pronouncements.

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.

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.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis