What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-13 compared with 2024-08-12 · 91 added, 120 removed, 159 unchanged (57% 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 June 30, 2024 and for the three and six months ended June 30, 2024 and 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.

(“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 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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Same motors, same blades, KULR VIBE optimized.

In addition to working with aviation applications, we have developed KULR Xero Vibration technology to eliminate vibration for cooling fans for data center server applications with the following key benefits:

We are eliminating wasted energy due to vibration

We will make cooling of AI servers more efficient with more airflow to the chips

Fans will produce less noise pollution for enhanced working environment in the data center environment

Fans will last longer due to less wear and tear caused by vibration

According to Technavio in an updated May 2024 report, the global wind turbine monitoring systems market is forecast to increase by USD 8.72 billion at a CAGR of 19.34% between 2023 and 2028.

Per the report, the market is expected to experience significant growth due to the increasing demand for optimizing energy production and ensuring the reliable operation of wind farms.

In particular, the vibration monitoring segment is estimated to witness significant growth during the forecast period.

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

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We believe the future of KULR is Energy + AI.

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

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Recent Developments

Liability Repayment

During the six months ended June 30, 2024, the Company issued 55,659,476 shares of common stock pursuant to SEPA Advance Notices submitted by the Company to Yorkville for aggregate proceeds of $15,173,357.

Of the gross proceeds, $9,104,950 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 and the Yorkville promissory note.

The Prepaid Advance Liability and the related accrued interest was repaid in full during the first quarter of 2024, and the promissory note was repaid in full on May 28, 2024.

The SEPA terminated June 1, 2024.

At the Market Offering

On July 3, 2024, the Company entered into an At the Market Offering agreement (the “ATM”) with an agent (the “Agent”), pursuant to which the Company may, from time to time, sell shares of common stock for aggregate gross proceeds of up to $20,000,000 in “at the market” offerings through or to the Agent.

On July 3, 2024, the Company entered into an At the Market Offering agreement (the “Sales Agreement”) with an agent (the “Agent”), pursuant to which the Company may, from time to time, sell shares of common stock for aggregate gross proceeds of up to $20,000,000 in “at the market” offerings through or to the Agent (the “ATM”).

Sales of the shares of common stock, if any, will be made at prevailing market prices at the time of the sale, or as otherwise agreed with the Agent.

The Agent will receive a commission from the Company of 3% of the gross proceeds of any shares of common stock sold pursuant to the ATM.

During the period from July 3, 2024, through August 9, 2024, the Company issued a total of 4,953,867 shares of common stock pursuant to the ATM for aggregate proceeds of $1,416,940.

Merchant Cash Advance Agreement and Finder’s Warrants

During the period from July 3, 2024, through September 30, 2024, the Company issued a total of 12,822,356 shares of common stock pursuant to the Sales Agreement for aggregate gross proceeds of $3,431,090.

During the period from October 1, 2024 through November 12, 2024, the Company issued 13,045,200 shares of common stock pursuant to the Sales Agreement for aggregate gross proceeds of $4,319,699.

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 the Company received $504,900 of cash (net of underwriting fees of $35,100), with the obligation to repay a total of $804,600 over thirty-two weekly payments of $25,143.75, beginning January 30, 2024.

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

As of November 13, 2024, the Company is current with its payments and the outstanding principal balance is $13,388.

On July 11, 2024, the Company entered into a merchant cash advance agreement (the “Third Cash Advance Agreement”) whereby the Company received $758,850 of cash (net of underwriting fees of $40,000 and $201,150 used to pay the remaining balance of the first merchant cash advance), with the obligation to repay a total of $1,350,000 over forty-three weekly payments of $31,395, beginning July 18, 2024.

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

On April 4, 2024, the finder of the First and Second Cash Advance Agreements, a FINRA registered financial advisor, accepted certain of the Finder’s fee as warrants to purchase up to 81,788 shares (the “First Warrant”) and 108,389 shares (the “Second Warrant”), respectively, of the Company’s common stock, at an exercise price of $0.1852 per share under the First Warrant, and $0.139 per share under the Second Warrant, respectively.

The First Warrant and the Second Warrant were exercisable immediately, and expire on January 22, 2027 and February 26, 2027, respectively.

As of November 13, 2024, the Company is current with its payments and the outstanding principal balance is $797,442.

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 debt discount of $60,000, made up of an original issue discount of $50,000 and cash 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.

This promissory note was repaid in full on May 28, 2024.

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.

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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.

Change in Compensation of CEO

Effective May 23, 2024, the Compensation Committee of the Board of Directors of the Company unanimously approved a change to the compensation payable to Michael Mo, the Chief Executive Officer (“CEO”).

Consistent with the Company’s continued efforts to reduce its cash consumption, the CEO has voluntarily agreed to a reduction in the cash component of his annual compensation by

approximately 33% or $112,345.

In lieu of the reduced cash compensation, the CEO will receive restricted stock units of the Company for 286,230 shares of common stock that will vest after one year.

This adjustment will aid the Company’s efforts in reducing its cash consumption, where such cash can be redirected towards other critical business needs and strategic initiatives.

This step also aligns the CEO compensation more closely with the performance of the Company and the interest of its stockholders.

Resignation of Director

Effective April 15, 2024, Mr.

Morio Kurosaki resigned as a director and all other positions of the Board.

Kurosaki’s decision to resign is due to his other professional obligations and not due to any disagreement with the Company, the Board or any member of the Company’s management.

Kurosaki served as the Chair of the Audit Committee and as a member of the Compensation Committee, and the Nominating & Corporate Governance Committee of the Board.

On April 12, 2024, on the disinterested recommendation of the Compensation Committee, the Board unanimously approved and authorized the issuance of immediately vested equity compensation equal to 15,000 shares that are due and payable pursuant to his year-to-date services through the effective date of resignation.

Appointment of New Director

Effective April 15, 2024, upon the joint recommendation of the Nominating & Corporate Governance Committee and the Compensation Committee, the Board appointed Donna Haley Grier as a director of the Board to hold office until the earlier of the expiration of the term of office, a successor is duly elected and qualified, or the time of her death, resignation, disqualification, or removal.

Grier was also appointed as the chair (and financial expert) of the Audit Committee of the Board, member of the Compensation Committee of the Board, and a member of the Nominating & Corporate Governance Committee of the Board.

Grier will receive cash compensation equal to $17,500 per quarter and was granted 140,000 restricted stock units of the Company’s common stock, of which 35,000 shares vest each quarter, beginning on June 30, 2024.

Director Compensation

On April 12, 2024, on the disinterested recommendation of the Compensation Committee, the Board unanimously approved equity compensation grants to Dr.

Joanna Massey issuable under the Company’s 2018 Equity Incentive Plan equal to (i) 15,000 immediately vested shares in connection with her year-to-date services through March 31, 2024;

and (ii) 140,000 restricted stock units of the Company’s common stock, of which 35,000 shares vest each quarter, beginning on June 30, 2024.

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.

This promissory note was paid in full on October 31, 2024.

Resignation of COO

Effective August 20, 2024, the Company entered into a Separation and General Release Agreement (the “Separation Agreement”) with Keith Cochran, pursuant to which Mr.

Cochran resigned as President and Chief Operating Officer of the Company, and all other appointments and positions held with the Company.

Cochran’s resignation from the Company is a result of his decision to pursue alternative professional and personal endeavors and not a result of any disagreements with the Company or the Board of Directors of the Company on any matter relating to its operations, policies or practices.

Pursuant to the terms of the Separation Agreement, on the effective date, Mr.

Cochran received termination benefits of (i) a lump sum payment of $99,551, (ii) early settlement of vested grants and accelerated vesting of a portion of Mr.

Cochran’s outstanding equity awards in the aggregate amount of 875,000 shares of the Company’s common stock, deliverable no earlier than November 25, 2024, and (iii) continuation of COBRA health insurance premiums for four months, in exchange for a release of claims in favor of the Company and its affiliates.

License and Opportunities for KULR VIBE Fan Balancing Applications

On September 29, 2024, we entered into a licensing agreement for our proprietary vibration reduction technology named KULR Xero Vibe (“KXV”).

The $2.35M landmark deal includes a $1.1M minimum guaranteed license and royalty fee, a unique opportunity for the licensee to purchase proprietary balancing equipment directly from the Company and additional revenue upside to the Company based on volume and technology upgrades.

The licensee, a leading Japanese corporation, specializing in systems integration and the distribution of advanced semiconductor solutions, intends to use the KXV technology to balance industrial-scale fan systems used in data center computer cooling, HVAC and other industrial applications.

The Company is exploring additional license opportunities based on geographic regions in tangential power-consuming applications, where the Company expects substantial upside revenue potential as product sales and royalty income scales along with its customers’ growth.

Change in Address of Principal Executive Offices

In the third quarter of 2024, we moved our principal executive offices to 555 Forge River Road, Suite 100, Webster, Texas 77598.

Risks Associated with Ongoing Conflicts

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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.

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.

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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 a notice letter (the “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 Six Months Ended June 30, 2024, Compared With Three and Six Months Ended June 30, 2023

Three and Nine Months Ended September 30, 2024, Compared With Three and Nine Months Ended September 30, 2023

Our revenues consisted of the following contract types:

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Product sales

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Total Revenue

For the three months ended June 30, 2024 and 2023, we generated $2,432,005 and $2,695,506 of revenues from 27 and 19 customers, respectively, representing a decrease of $263,501, or 10%.

For the six months ended June 30, 2024 and 2023, we generated $4,181,109 and $4,455,308 of revenues from 48 and 29 customers, respectively, representing a decrease of $274,199, or 6%.

Revenue from product sales during the three months ended June 30, 2024, decreased by $822,601 or 42% compared to the three months ended June 30, 2023.

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

We had 15 product sales customers in the second quarter of 2024, compared with 12 in the second quarter of 2023.

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

For the three months ended September 30, 2024 and 2023, we generated $3,185,778 and $3,041,007 of revenues from 33 and 18 customers, respectively, representing an increase of $144,771, or 5%.

For the nine months ended September 30, 2024 and 2023, we generated $7,366,887 and $7,496,315 of revenues from 62 and 37 customers, respectively, representing a decrease of $129,428, or 2%.

Revenue from product sales during the three months ended September 30, 2024, decreased by $1,131,269 or 60% compared to the three months ended September 30, 2023.

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

We had 20 product sales customers in the third quarter of 2024, compared with 13 in the third quarter of 2023.

The decline in product revenue can be attributed to several expected third quarter 2024 orders, which management now expects to receive in a later period.

We can provide no assurance as to when we will receive the expected orders.

Revenue from product sales during the six months ended June 30, 2024, decreased by $1,836,766 or 51% compared to the six months ended June 30, 2023.

We had 36 product sales customers in the first six months of 2024, compared with 22 in the first six months 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 product sales during the nine months ended September 30, 2024, decreased by $2,968,035 or 54% compared to the nine months ended September 30, 2023.

We had 47 product sales customers in the nine months of 2024, compared with 29 in the nine months of 2023.

The decline in product revenue can be attributed to several expected third quarter 2024 orders, which management now expects to receive in a later period.

We can provide no assurance as to when we will receive the expected orders.

Revenue from contract services during the three months ended June 30, 2024, increased by $559,100 or 76% compared to the three months ended June 30, 2023.

Revenue from contract services during the three months ended September 30, 2024, increased by $247,273 or 22% compared to the three months ended September 30, 2023.

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

We had 14 contract services customers in the second quarter of 2024, compared with 7 in the second quarter of 2023.

One large contract received during the second quarter of 2024 generated $460,000 of service revenues, while $217,689 of service revenues previously deferred, were also recognized during the three months ended June 30, 2024.

Revenue from contract services during the six months ended June 30, 2024, increased by $1,562,567 or 180% compared to the six months ended June 30, 2023.

We had 21 contract services customers in the first six months of 2024, compared with 11 in the first six months of 2023.

Five large contracts received during 2024 generated $1,113,871 of service revenues, while $529,880 of service revenues deferred at December 31, 2023 were recognized in the first six months of 2024.

We had 17 contract services customers in the third quarter of 2024, compared with 7 in the third quarter of 2023.

Contract services customers increased in both design and testing services for new and existing customers.

Revenue from contract services during the nine months ended September 30, 2024, increased by $1,809,840 or 90% compared to the nine months ended September 30, 2023.

We had 30 contract services customers in the nine months of 2024, compared with 14 in the nine months of 2023.

We expect to continue expansion in number of contract service customers and total revenue contribution.

Revenue from IP license agreement during the three months ended September 30, 2024, was $1,028,767.

License revenue consists of a contract with a customer for the right to use our patented KULR VIBE technology.

This contract was executed during the three months ended September 30, 2024.

There was no license revenue recognized prior to this period.

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

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

For the three months ended June 30, 2024 and 2023, cost of revenues was $1,859,377 and $1,693,318, respectively, representing an increase of $166,059 or 10%.

For the three months ended June 30, 2024 and 2023, gross profit was $572,628 and $1,002,188, respectively, a decline of $429,560 or 43%.

Our gross profit margins were 24% and 37%, during the three months ended June 30, 2024 and 2023, respectively.

The decrease in the current period profit margin was primarily due to (a) approximately $350,000 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 $80,000 increase in quarterly depreciation expense for revenue generating equipment that was put into service during the last month of the quarter ended March 31, 2023.

For the six months ended June 30, 2024 and 2023, cost of revenues was $3,097,692 and $2,809,732, respectively, representing an increase of $287,960 or 10%.

For the six months ended June 30, 2024 and 2023, gross profit was $1,083,417 and $1,645,576, respectively, a decline of $562,159 or 34%.

Our gross profit margins were 26% and 37%, during the six months ended June 30, 2024 and June 30, 2023, respectively.

The decrease in the current period profit margin was primarily due to (a) approximately $600,000 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 $250,000 increase in quarterly depreciation expense for revenue generating equipment that was put into service during the last month of the quarter ended March 31, 2023.

For the three months ended September 30, 2024 and 2023, cost of revenues was $928,326 and $1,703,553, respectively, representing a decrease of $775,227 or 46%.

For the three months ended September 30, 2024 and 2023, gross profit was $2,257,452 and $1,337,454, respectively, an increase of $919,998 or 69%.

Our gross profit margins were 71% and 44%, during the three months ended September 30, 2024 and 2023, respectively.

The increase in the current period profit margin resulted primarily from an IP licensing agreement that generated $1,028,767 of revenue which had no corresponding cost of revenue.

For the nine months ended September 30, 2024 and 2023, cost of revenues was $4,026,018 and $4,513,285, respectively, representing an decrease of $487,267 or 11%.

For the nine months ended September 30, 2024 and 2023, gross profit was $3,340,869 and $2,983,030, respectively, an increase of $357,839 or 12%.

Our gross profit margins were 45% and 40%, during the nine months ended September 30, 2024 and September 30, 2023, respectively.

The increase in the current period profit margin resulted primarily from an IP licensing agreement that generated $1,028,767 of revenue which had no corresponding cost of 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, 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 June 30, 2024 and 2023, R&D expenses were $1,305,186 and $1,924,138, respectively, representing a decrease of $618,952 or 32%.

The decrease was comprised primarily of $488,017 of labor costs allocated to cost of revenue due to the increase in service revenue, $171,905 related to a planned decrease in R&D consulting services to conserve cash and an $81,737 decrease in stock-based compensation, partially offset by an increase in building related expenses of approximately $149,000 for the facility in Texas.

For the six months ended June 30, 2024 and 2023, R&D expenses were $2,259,811 and $3,729,153, respectively, representing a decrease of $1,469,342 or 39%.

The decrease was comprised primarily of $1,018,387 of labor costs allocated to cost of revenue due to the increase in service revenue, $599,351 related to a planned decrease in R&D consulting services to conserve cash, partially offset by an increase in building related expenses of approximately $190,000 for the facility in Texas.

For the three months ended September 30, 2024 and 2023, R&D expenses were $1,232,333 and $1,821,658, respectively, representing a decrease of $589,325 or 32%.

The decrease was comprised primarily of $538,784 of labor costs allocated to cost of revenue due to the increase in service revenue, $180,075 related to a planned decrease in R&D consulting services to conserve cash and a $69,267 decrease in stock-based compensation, partially offset by an increase in building related expenses of approximately $208,399 for the facility in Texas.

For the nine months ended September 30, 2024 and 2023, R&D expenses were $3,492,144 and $5,842,611, respectively, representing a decrease of $2,350,467 or 40%.

The decrease was comprised primarily of $1,437,862 of labor and other R&D costs allocated to cost of revenue due to the increase in service revenue, $779,425 related to a planned decrease in R&D consulting services to conserve cash and a $232,829 decrease in stock-based compensation, partially offset by an increase in building related expenses of approximately $273,709 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.

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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 June 30, 2024 and 2023, selling, general and administrative expenses were $4,594,500 and $5,158,030, respectively, representing a decrease of $563,530 or 11%.

The decrease is primarily due to a planned decrease in outsourced professional services of $533,052, a decrease of $56,538 for stock-based compensation, partially offset by an increase in building expenses of $53,254.

For the six months ended June 30, 2024 and 2023, selling, general and administrative expenses were $8,807,401 and $10,257,121, respectively, representing a decrease of $1,449,720 or 14%.

The decrease is primarily due to a planned decrease in outsourced professional services of $1,106,778, a decrease in labor costs of $236,725 due to the workforce reduction in December of 2023 and a decrease of $48,412 for stock-based compensation.

For the three months ended September 30, 2024 and 2023, selling, general and administrative expenses were $2,735,419 and $4,612,824, respectively, representing a decrease of $1,877,405 or 41%.

The decrease is primarily due to a reduction in stock-based compensation due to clawing back amortization for unvested, cancelled restricted stock awards of $638,592, a decrease in advertising expense of $571,238 due to a sponsorship agreement terminating in 4Q23, and a decrease of $481,661 in depreciation expense primarily due to leasehold improvements for the San Diego facility being fully depreciated in 2Q24.

For the nine months ended September 30, 2024 and 2023, selling, general and administrative expenses were $11,542,820 and $14,578,145, respectively, representing a decrease of $3,035,325 or 21%.

The decrease is primarily due to a planned decrease in advertising and marketing services of $1,345,581, a decrease in stock-based compensation of of $687,004 primarily due to clawing back amortization for unvested, cancelled restricted stock units, a planned decrease in outsourced professional services of $602,438, and a decrease in labor costs of $182,533 due to the workforce reduction in December of 2023.

Other (Expense) Income

For the three months ended June 30, 2024 and 2023, other expense, net, was a net expense of $563,470 and $255,012, respectively, representing an increase of $308,458, or 121%.

The change is primarily attributable to an increase of $312,644 for amortization of debt discount in connection with the Prepaid Advance Liability and notes payable, an increase of $159,389 for the change in fair value of accrued issuable equity, partially offset by a decrease in interest recorded in connection with the Prepaid Advance Liability of $163,576.

For the six months ended June 30, 2024 and 2023, other expense, net, was a net expense of $915,609 and $597,155, respectively, representing an increase of $318,454, or 53%.

The change is primarily attributable to an increase of $241,402 for amortization of debt discount in connection with the Prepaid Advance Liability and notes payable, an increase of $236,499 for the change in fair value of accrued issuable equity and $31,358 related to a 2024 loss on the extinguishment of debt related to the Prepaid Advance Liability, partially offset by a decrease of $190,805 in interest recorded in connection with the Prepaid Advance Liability.

For the three months ended September 30, 2024 and 2023, other expense, net, was a net expense of $293,464 and $465,246, respectively, representing a decrease of $171,782, or 37%.

The change is primarily attributable to a decrease in interest expense of $158,686 due to the full repayment of the prepaid advance liability during 1Q24, a decrease of $56,210 due to the change in fair value of of accrued issuable equity, partially offset by an increase of $43,114 for amortization of debt discount in connection with merchant cash advances.

For the nine months ended September 30, 2024 and 2023, other expense, net, was a net expense of $1,209,073 and $1,062,401, respectively, representing an increase of $146,672, or 14%.

The change is primarily attributable to an increase of $284,516 for amortization of debt discount in connection with merchant cash advances, an increase of $180,289 for the change in fair value of accrued issuable equity and $31,358 related to a 2024 loss on the extinguishment of debt related to the Prepaid Advance Liability, partially offset by a decrease of $349,491 in interest due to the full repayment of the prepaid advance liability during 1Q24.

Liquidity and Capital Resources

As of June 30, 2024 and December 2023, we had cash balances of $1,016,943 and $1,194,764, respectively, and a working capital deficit of $2,381,478 and $2,994,753, respectively.

For the six months ended June 30, 2024 and 2023, net cash used in operating activities was $9,198,453 and $9,858,687, respectively.

Our net cash used in operating activities for the six months ended June 30, 2024, was primarily attributable to our net loss of $10,899,404, adjusted for non-cash expenses in the aggregate amount of $3,970,681, plus $2,269,730 of net cash used to fund changes in the levels of operating assets and liabilities.

Our net cash used in operating activities for the six months ended June 30, 2023, was primarily attributable to our net loss of $12,937,853, adjusted for non-cash expenses in the aggregate amount of $3,192,878, as well as $113,712 of net cash used to fund changes in the levels of operating assets and liabilities.

For the six months ended June 30, 2024 and 2023, net cash used in investing activities was $163,023 and $894,976, respectively.

Net cash used in investing activities during the six months ended June 30, 2024, was related to purchases of property and equipment.

Net cash used in investing activities during the six months ended June 30, 2023, included $759,976 related to purchases of property and equipment and $135,000 for the acquisition of intangible assets.

For the six months ended June 30, 2024 and 2023, net cash provided by financing activities was $9,183,655 and $1,740,751, respectively.

Net cash provided by financing activities during the six months ended June 30, 2024, was due to proceeds from SEPA Advance Notices totaling $9,104,950, and net proceeds from notes payable totaling $1,730,000, partially offset by notes payable repayments of $1,525,195 and issuance costs on notes payable of $126,100.

Net cash provided by financing activities during the six months ended June 30, 2023, was from proceeds from the second prepaid advance of $2,000,000, partially offset by $229,249 for the repurchase of common stock to pay tax on behalf of an employee for vested shares of restricted common stock and $30,000 for financing costs associated with the prepaid advance.

Future cash requirements for our current liabilities as of June 30, 2024, include $4,811,565 for accounts payable and accrued expenses, $784,006 for notes payable and $487,369 for operating leases.

Future cash requirements for long-term liabilities as of June 30, 2024, include $1,059,898 for operating leases, and $250,000 for notes payable.

As of September 30, 2024 and December 2023, we had cash balances of $912,417 and $1,194,764, respectively, and a working capital deficit of $1,157,755 and $2,994,753, respectively.

For the nine months ended September 30, 2024 and 2023, net cash used in operating activities was $12,498,818 and $10,893,050, respectively.

Our net cash used in operating activities for the nine months ended September 30, 2024, was primarily attributable to our net loss of $12,903,168, adjusted for non-cash expenses in the aggregate amount of $4,721,844, plus $4,317,494 of net cash used to fund changes in the levels of operating assets and liabilities.

Our net cash used in operating activities 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.

For the nine months ended September 30, 2024 and 2023, net cash used in investing activities was $211,005 and $993,699, respectively.

Net cash used in investing activities during the nine months ended September 30, 2024, was related to purchases of property and equipment of $188,267 and deposits paid for purchases of property and equipment of $22,738.

Net 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.

For the nine months ended September 30, 2024 and 2023, net cash provided by financing activities was $12,427,476 and $2,720,501, respectively.

Net cash provided by financing activities during the nine months ended September 30, 2024, was primarily due to proceeds from SEPA Advance Notices totaling $9,104,950, net proceeds from ATM equity financing totaling $3,327,372, and net proceeds from notes payable totaling $2,563,900, partially offset by notes payable repayments of $2,439,855, and payments for deferred financing costs of $128,041.

Net cash provided by financing activities during the nine months ended September 30, 2023 was due to the net proceeds from a public offering of $2,554,750 and net proceeds from prepaid advances of $1,970,000, partially offset by repayments of the Prepaid Advance of $1,575,000, and repurchases of common stock of $229,249.

Future cash requirements for our current liabilities as of September 30, 2024, include $4,375,171 for accounts payable and accrued expenses, $1,245,529 for secured notes payable and $507,959 for payments under operating and finance leases.

Future cash requirements for long-term liabilities as of September 30, 2024, include $930,361 for operating and finance leases, and $266,604 for notes payable.

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 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.

This note was fully repaid on May 28, 2024.

See Note 9 – Notes Payable 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 9 – Notes Payable – for additional information.

Subsequent to June 30, 2024, the Company entered into an At the Market Offering agreement (the “ATM”) to raise up to $20,000,000 through sales of the Company’s common stock.

During the period from July 3, 2024, through August 9, 2024, the Company has sold 4,953,867 shares of common stock pursuant to this offering, with gross proceeds of $1,416,940.

On July 11, 2024, the Company entered into a third merchant cash advance agreement (the “Third Cash Advance Agreement”) with a lender, pursuant to which the Company received $758,850 of cash (net of underwriting fees of $40,000 and $201,150 used to pay the remaining balance of the first merchant cash advance), with the obligation to repay a total of $1,350,000 over forty-three weekly payments of $31,395, beginning July 18, 2024.

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

In addition, on July 11, 2024, the Company fully repaid the balance on the first cash advance ($201,150) and amended the Second Cash Advance to reduce the weekly repayment amount from $26,820 to $15,620 and extend the repayment period from September 27, 2024 to November 15, 2024.

On July 3, 2024, the Company entered into an At the Market Offering agreement (the “ATM”) to raise up to $20,000,000 through sales of the Company’s common stock.

During the period from October 1, 2024 through November 12, 2024, the Company has sold 13,045,200 shares of common stock pursuant to this offering, with gross proceeds of $4,319,699.

As of the filing date of this Quarterly Report, our outstanding notes payable have been reduced to $1,060,831.

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, and there is no assurance that the Company will be able to obtain additional funds on commercially acceptable terms, if at all.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis