Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Quarterly Report, and other factors that we may not know. There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on April 12, 2024, unless disclosed elsewhere in this Quarterly Report.
Overview
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; making energy consumption safer and cooler; using less materials to achieve these goals; 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)
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,
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(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.
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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. 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, 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.
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KULR VIBE Solution
During 2022, we acquired intellectual property from Vibetech International, LLC (“Vibetech”), which allows KULR to expand itself as a vertically integrated energy management company focused on sustainable energy solutions. For nearly twenty years, the primary application has been aviation. However, advances in measurement and computing technologies have allowed KULR VIBE to provide transformative and scalable solutions across transportation, renewable energy (wind farm), manufacturing, industrial, performance racing and autonomous aerial (drone) applications among others. KULR VIBE addresses one the most challenging issues with advanced machinery today; excessive energy robbing vibrations that are destructive to both the machinery and in many cases the operator. The KULR VIBE suite of technologies utilize proprietary sensor processes with advanced learning algorithms to both achieve precision balancing solutions, and successfully predict component failure based on its comprehensive database of vibration signatures. Its enhanced AI learning algorithms pinpoint areas where excess vibrations cause a loss of energy that can lead to system malfunctions, weakened performance, and maintenance issues.
This innovative technology can be utilized as a standalone solution or be paired with existing track and balance technology to facilitate vibration reduction, achieve increased energy production, and reduce mechanical failures thereby extending platform life. KULR VIBE recently balanced the motors and blades of a mission critical drone to demonstrate the benefits of the technology. The results were a 23% increase in battery life and a lift increase of 45%. 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:
1. We are eliminating wasted energy due to vibration
2. We will make cooling of AI servers more efficient with more airflow to the chips
3. Fans will produce less noise pollution for enhanced working environment in the data center environment
4. 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. 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
We believe the future of KULR is Energy + AI. 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:
● Aerospace and defense systems, such as CubeSat batteries meeting JSC 20793 safety requirements by NASA
● Power tools and industrial equipment
● High-performance electric vehicles
● Electric vertical take-off and landing (“eVOTL”)
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● Electric micro-mobility vehicles
● Residential and commercial energy storage systems
Recent Developments
At the Market Offering
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 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. The Cash Advance Agreement is secured by the Company’s accounts receivable and related cash receipts. On July 11, 2024, this merchant cash advance was repaid in full.
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 the Company received $502,200 of cash (net of underwriting fees of $37,800), with the obligation to repay a total of $804,600 over thirty weekly payments of $26,820, beginning February 29, 2024. On July 11, 2024, the parties amended the agreement whereby the weekly repayment amount was reduced from $26,820 to $15,620 and the repayment due date was extended from September 27, 2024 to November 15, 2024. 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. As of November 13, 2024, the Company is current with its payments and the outstanding principal balance is $797,442.
Promissory Notes
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. This promissory note was paid in full on October 31, 2024.
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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. Mr. 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
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’
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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.
Results of Operations
Three and Nine Months Ended September 30, 2024, Compared With Three and Nine Months Ended September 30, 2023
Revenue
Our revenues consisted of the following contract types:
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Product sales
$
765,201
$
1,896,470
$
2,515,063
$
5,483,098
Contract services
1,391,810
1,144,537
3,823,057
2,013,217
IP license
1,028,767
—
1,028,767
—
Total Revenue
$
3,185,778
$
3,041,007
$
7,366,887
$
7,496,315
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 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 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 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.
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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. 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, Gross Profit and Gross Profit Margin
Cost of revenue consisted of the cost of our products as well as labor and production overhead expenses directly related to product sales or research contract services.
Product mix plays an important part in our reported average margins for any period. Because we are introducing new products at an early stage in our development cycle, 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 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. Research and development expenses are charged to operations as incurred.
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.
Selling, General and Administrative
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.
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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 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 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.
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Our primary source of liquidity has historically been cash generated from equity and debt offerings. Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. We have a history of recurring net losses, recurring use of cash in operations and declining working capital.
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. Further, 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 do not include any adjustments relating to the recoverability of assets and the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Estimates
We prepare our condensed 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 in the notes to our financial statements.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as defined by Rule 229.10(f)(1) and are not required to provide the information required by this Item.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.