What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 126 added, 95 removed, 121 unchanged (65% of the section changed)

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Executive Summary

We continued to realize significant revenue growth during the three and six months ended June 30, 2023, as compared to the same periods in 2022.

Revenue for the three months ended June 30,

2023, totaled $4.7 million, an increase of 20%, as compared to $3.9 million for the same period of 2022.

Revenue for the six months ended June 30, 2023, totaled $8.5 million, an increase of 19%, as compared to $7.1 million for the same period

Net loss for the three months ended June 30, 2023, was $7.3 million, or $0.01 per basic and diluted share, compared to a net income of $1.6 million, or $0.00 per basic and diluted share, for

the same period in 2022.

The increase in our net loss for the three months ended June 30, 2023, was primarily due to continued losses on the fair value of our derivatives, which totaled $3.8 million of expense in the period For the three

months ended June 30, 2023, our operating income totaled $0.9 million, which is an improvement of $4.0 million compared to 2022, which aligns with our initiative to drive profitable growth and manage spend through 2023.

Net loss for the six months ended June 30, 2023, was $20.3 million, or $0.04 per basic and diluted share, compared to a net loss of $3.5 million, or $0.01 per basic and diluted share, for the

same period in 2022.

The increase in our net loss for the six months ended June 30, 2023, was primarily due to continued losses on the fair value of our derivatives, which totaled $10.6 million of expense in the period.

For the six months

ended June 30, 2023, our operating loss totaled $1.0 million, which is an improvement of $4.0 million compared to the same period in 2022, which aligns with our initiative to drive profitable growth and manage spend through 2023.

We continued to realize significant revenue growth during the three and nine months ended September 30, 2023, as compared to the same periods in 2022.

Revenue for the three months ended

September 30, 2023, totaled $5.0 million, an increase of 19%, as compared to $4.2 million for the same period of 2022.

Revenue for the nine months ended September 30, 2023, totaled $13.4 million, an increase of 19%, as compared to $11.2

million for the same period of 2022.

Net loss for the three months ended September 30, 2023, was $23.7 million, or $0.03 per basic and diluted share, compared to a net loss of $1.1 million, or $0.00 per basic and diluted share,

for the same period in 2022.

The increase in our net loss for the three months ended September 30, 2023, was primarily due to continued losses on the fair value of our derivatives, which totaled $19.3 million of expense in the period.

three months ended September 30, 2023, our operating loss totaled $0.5 million, which is an improvement of $2.0 million compared to 2022.

Net loss for the nine months ended September 30, 2023, was $44.0 million, or $0.06 per basic and diluted share, compared to a net loss of $4.6 million, or $0.01 per basic and diluted share,

for the same period in 2022.

The increase in our net loss for the nine months ended September 30, 2023, was primarily due to continued losses on the fair value of our derivatives, which totaled $29.9 million of expense in the period.

nine months ended September 30, 2023, our operating loss totaled $1.6 million, which is an improvement of $5.9 million compared to the same period in 2022, which aligns with our initiative to drive profitable growth and manage spend through

Merger Agreement with SEPA

On August 23, 2023, we entered into an Agreement and Plan of Merger (the “ Merger Agreement ”) by and among SEP Acquisition Corp., a Delaware corporation (“ SEPA ”), SEP Acquisition

Holdings Inc., a Nevada corporation, and a wholly owned subsidiary of SEPA (“ Merger Sub ”).

Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA (the “ Merger ”) will be affected.

specifically, and as described in greater detail below, at the effective time of the Merger (the “ Effective Time ”):

Merger Sub will merge with and into the Company, with the Company being the surviving company following the merger.

Each issued and outstanding share of the Company common stock will automatically be converted into Class A common stock of SEPA, par value $0.0001 per share, at the Conversion Ratio (as defined in the

Merger Agreement);

Outstanding Company convertible securities of the Company will be assumed by SEPA and will be converted into the right to receive Class A Common Stock of SEPA.

Pursuant to the terms of the Merger Agreement, the holders of (i) Company common stock, (ii) options to purchase Company common stock, (iii) warrants to purchase Company common stock, and

(iv) convertible promissory notes, collectively will be entitled to receive 7,793,000 shares of Class A Common Stock of SEPA.

Out-of-the-money options and out-of-the-money warrants will be assumed by SEPA and converted into options or warrants,

respectively, exercisable for shares of Class A Common Stock based on the Conversion Ratio;

however, such out-of-the-money options and out-of-the-money warrants shall not be reserved for issuance from the Merger Consideration.

The Merger Agreement contains certain conditions to Closing, including the following:

holders of 80% or more of the Company’s convertible notes with a maturity date occurring after the date of the Closing (the “ Closing Date ”), measured by number of shares of our common stock into

which such convertible notes may be converted, agreeing to convert their convertible notes into shares of common stock immediately prior to the Effective Time.

holders of 80% or more of the Company’s warrants that would be outstanding on the Closing Date, measured by number of shares of our common stock subject to all such warrants in the aggregate, agreeing to

convert their warrants into shares of common stock immediately prior to the Effective Time.

SEPA having, at the Closing, at least $12,000,000 in cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of any redemptions) and

the proceeds of any private placement in SEPA.

As of the date of this Quarterly Report on Form 10-Q, the holders of approximately 95% of our outstanding warrants covered by the preceding covenant and 100% of our

outstanding convertible notes covered by the preceding covenant have committed to exchange such warrants and convertible notes for an aggregate of 1,122,677,498 shares and 280,812,105 shares, respectively, of our common stock immediately prior

to the Closing.

Non-GAAP Financial Measures

Throughout this Management’s Discussion and Analysis, we present certain financial measures that facilitate management's review of the operational performance of the Company and as a basis

for strategic planning;

however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S.) (U.S.

These financial measures are

considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, financial measures presented in accordance with U.S.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we present certain financial measures that facilitate management's review of the

operational performance of the Company and as a basis for strategic planning;

however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United

States (U.S.) (U.S.

These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, or a replacement for, financial measures presented in accordance with

The Company uses Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA to assess its operating performance.

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relative to competitors.

The measure also helps the Company to make operational and strategic decisions.

These measures also help the Company to make operational and strategic decisions.

The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results

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Do not reflect all changes in our working capital needs.

Do not reflect the interest expense, or the amount necessary to service our outstanding debt.

Do not reflect interest expense, or the amount necessary to service our outstanding debt.

As presented in the GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measure excludes the impact of certain charges that contribute to our net loss (Non-GAAP

Adjustments).

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(in thousands)

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Other non-cash or one-time charges:

Release of historical accrued expenses

Release of historical accrued employee compensation expenses

Shares for Services

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

(in Thousands)

Total Revenue

Cost of Revenues

Gross Margin Percentage

Operating Expenses:

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Research and development

Operating Income (loss)

Depreciation and amortization

Operating Loss

Other Income (Expense), net

Net (Loss) Income

nm - Not Meaningful

Revenues and Gross Margin

Revenues for the three month-period ended June 30, 2023, were $4.7 million compared to $3.9 million for the same period of 2022, an increase of $0.8 million, or 20%.

was primarily driven by the continued increased sales of our UltraMIST® system.

Gross margin as a percentage of revenue increased to 74% during the three months ended June 30, 2023, from 72% in the same period of 2022.

The increase in gross margin percentage for the three months ended June 30, 2023, was primarily driven by stronger pricing.

Revenues for the six months ended June 30, 2023, were $8.5 million compared to $7.1 million for the same period of 2022, an increase of $1.4 million, or 19%.

Gross margin as a percentage of

revenue decreased to 71% for the six months ended June 30, 2023, from 72% in the same period in 2022.

The decrease for the six months ended June 30, 2023, as compared to the same period in 2022, was primarily due to higher cost of production from

our third-party manufacturers.

Revenues for the three month-period ended September 30, 2023, were $5.0 million compared to $4.2 million for the same period of 2022, an increase of $0.8 million, or 19%.

The increase was

primarily driven by the continued increased sales of our UltraMIST® system.

The increase in revenues was due to an increase in the average selling price of our consumables and parts revenue of 9% year over year, and the remainder of the growth

in the number of consumables and systems sold year over year.

Gross margin as a percentage of revenue decreased to 71% during the three months ended September 30, 2023, from 72% in the same period of 2022.

Revenues for the nine months ended September 30, 2023, were $13.4 million compared to $11.2 million for the same period of 2022, an increase of $2.2 million, or 19%.

Gross margin as a

percentage of revenue decreased to 71% for the nine months ended September 30, 2023, from 72% in the same period in 2022.

General and Administrative Expenses

General and administrative expenses decreased $2.5 million or 67% for the three months ended June 30, 2023, compared with the same period of 2022.

decrease for the three months ended June 30, 2023, was primarily due to restructuring activities.

General and administrative expenses decreased $2.0 million or 33% for the six months ended June 30, 2023, compared to the same period in 2022.

This decrease was primarily due to continued cost management activities and restructuring activities.

General and administrative expenses decreased $0.8 million or 23% for the three months ended September 30, 2023, compared with the same period of 2022.

The decrease for the three months ended

September 30, 2023, was primarily due to cost savings activities.

General and administrative expenses decreased $2.8 million or 30% for the nine months ended September 30, 2023, compared to the same period in 2022.

This decrease was primarily

due to continued cost management activities and restructuring activities.

Selling and Marketing Expenses

Selling and marketing expenses decreased by $694 thousand or 42% for the three months ended June 30, 2023, as compared with the same period of 2022.

Selling and marketing expenses decreased by

$997 thousand or 29% for the six months ended June 30, 2023, as compared with the same period of 2022.

Selling and marketing expenses decreased by $0.6 million or 37% for the three months ended September 30, 2023, as compared with the same period of 2022.

Selling and marketing expenses decreased

by $1.6 million or 32% for the nine months ended September 30, 2023, as compared with the same period of 2022.

The decreases were primarily due to a reduction in sales headcount during 2023 and other cost management activities.

Research and Development Expenses

Research and development expenses decreased $32 thousand or 19% for the three months ended June 30, 2023, as compared with the same period of 2022.

Research and development expenses increased slightly or 5% for the three months ended September 30, 2023, as compared with the same period of 2022.

Research and development expenses as a

percentage of revenue decreased from 4% during the three months ended June 30, 2022, to 3% for the same period in 2023.

percentage of revenue decreased from 4% during the three months ended September 30, 2022, to 3% for the same period in 2023.

The decrease was primarily due to improved cost management in 2023.

Research and development expenses decreased $67 thousand or 20% for the six months ended June 30, 2023, as compared with the same period of 2022.

Research and development expenses decreased $58 thousand or 12% for the nine months ended September 30, 2023, as compared with the same period of 2022.

Research and development expenses as a

percentage of revenue decreased from 5% during the six months ended June 30, 2022, to 3% for the same period in 2023.

percentage of revenue decreased from 4% during the nine months ended September 30, 2022, to 3% for the same period in 2023.

The decrease was primarily due to improved cost management in 2023.

Other Income (Expense), net

Other (Expense)/Income, net

For the three months

ended June 30,

For the six months

ended June 30,

ended September 30,

For the nine months

ended September 30,

Interest expense

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nm - not meaningful

Other expense, net increased by $12.9 million to $8.2 million for the three months ended June 30, 2023, as compared to the same period for 2022.

Other expense, net increased $20.8 million to

$19.3 million for the six months ended June 30, 2023, as compared to the same period for 2022.

These increases were primarily due to increased convertible promissory notes outstanding from the transactions executed during 2022 and an increased

change in the fair value of warrants and their embedded conversion liabilities.

Other expense, net increased by $24.5 million to $23.2 million for the three months ended September 30, 2023, as compared to the same period for 2022.

Other expense, net increased $45.4 million

to $42.5 million for the nine months ended September 30, 2023, as compared to the same period for 2022.

These increases were primarily due to increased convertible promissory notes and ABS Promissory Notes outstanding from the transactions

executed during 2022 and 2023 and continued losses recognized for the change in fair value of warrants and their embedded conversion liabilities.

Liquidity and Capital Resources

Since inception, we have incurred losses from operations each year.

As of June 30, 2023, we had an accumulated deficit of $215 million.

Historically, our operations have

primarily been funded from the sale of capital stock, notes payable, and convertible debt securities.

The recurring losses from operations, the events of default on our notes payable, and dependency upon

future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q.

devote substantial resources for the commercialization of UltraMIST and PACE systems which will require additional capital resources to remain a going concern.

Management’s plans are to obtain additional capital in 2023 through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or

secured or unsecured debt.

As of September 30, 2023, we had an accumulated deficit of $238.3 million.

Historically, our

operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities.

The recurring losses from operations, the events of default on our notes payable, and

dependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q.

We expect to devote substantial resources for the commercialization of UltraMIST and PACE systems which will require additional capital resources to remain a going concern.

Management’s plans are to obtain additional capital in 2023 or early 2024 primarily through the closure of the Merger, which is expected to add approximately $12 million

of additional capital and funding to the Company.

We could alternatively obtain capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured

These possibilities, to the extent available, may be on terms that result in significant dilution to our existing stockholders.

In addition, there can be no assurances that our plans to obtain additional capital will

be successful on the terms or timeline we expect, or at all.

If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable

For the six months ended June 30,

In addition, there can be no assurances that our plans to obtain additional capital will be successful on the

terms or timeline we expect, or at all.

If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.

Statement of Cash Flows

For the nine months ended September 30,

(in Thousands)

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Cash flows provided by financing activities

Cash used in operating activities during the six months ended June 30, 2023, totaled $1.2 million as compared to $5.2 million in the previous period.

This improvement in cash used in operations aligns with our approach to drive profitable growth and manage costs.

Cash provided by financing activities of $1.4 million for the six months ended June 30, 2023, was primarily due to new convertible lending activities to fund our growth.

Cash provided by

financing activities for the six months ended June 30, 2022, consisted primarily of $5.0 million received from our senior lender.

Cash used in operating activities during the nine months ended September 30, 2023, totaled $3.3 million as compared to $13.2 million in the previous period.

This improvement in cash used in

operations aligns with our approach to drive profitable growth and manage costs.

Cash provided by financing activities of $3.4 million for the nine months ended September 30, 2023, was primarily due to new bridge notes payable and convertible lending activities to fund

Cash provided by financing activities for the nine months ended September 30, 2022, consisted primarily of $5.0 million received from our senior lender.

Critical Accounting Policies and Estimates

We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S.

Our significant accounting policies are disclosed in Note 4 to the

consolidated financial statements in Part II Item 8.

We have used various accounting policies to prepare the condensed consolidated financial statements in accordance with U.S.

Our significant accounting policies are disclosed in Note 4 to

the consolidated financial statements in Part II Item 8.

“Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.

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When we acquire a business, the assets acquired, and liabilities assumed are recorded at their respective fair values on the acquisition date.

Goodwill is the excess of the purchase price over the estimated fair value of net assets of acquired businesses.

Goodwill is the excess of the purchase price

over the estimated fair value of net assets of acquired businesses.

Intangible assets primarily include patents, trademarks, and customer relationships.

Determining the fair value of intangible

assets acquired as part of a business combination requires us to make significant estimates.

These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those

cash flows to present value, and the assessment of the asset’s life cycle.

Determining the fair value of intangible assets acquired as part of a business combination

requires us to make significant estimates.

These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, and the assessment of

the asset’s life cycle.

The estimates could be impacted by legal, technical, regulatory, economic, and competitive risks.

The test for impairment of goodwill requires us to make several

estimates to determine the fair value of the goodwill.

Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our condensed consolidated balance sheets and the judgment

required in determining fair value.

We assess the impairment of goodwill at the consolidated level annually.

We also test definite-lived intangible assets for impairment when an event occurs, or circumstances change that would indicate the

carrying amount of the assets or asset group may be impaired.

Our assessment for goodwill and intangible assets impairment is based on future cash flows that require significant judgment with respect to future revenue and expense growth rates

and other assumptions and estimates.

We use estimates that are consistent with the highest and best use of the assets based on a market participant’s view of the assets being evaluated.

Actual results may differ from our estimates due to

several factors including, among others, changes in competitive conditions, regulatory changes, results of clinical trials, and changes in worldwide economic conditions.

The test for impairment of goodwill requires us to make several estimates to determine the fair value of the goodwill.

estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our condensed consolidated balance sheets and the judgment required in determining fair value.

We assess the impairment of

goodwill at the consolidated level annually.

We also test definite-lived intangible assets for impairment when an event occurs, or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired.

assessment for goodwill and intangible assets impairment is based on future cash flows that require significant judgment with respect to future revenue and expense growth rates and other assumptions and estimates.

We use estimates that are

consistent with the highest and best use of the assets based on a market participant’s view of the assets being evaluated.

Actual results may differ from our estimates due to several factors including, among others, changes in competitive

conditions, regulatory changes, results of clinical trials, and changes in worldwide economic conditions.

Segment and Geographic Information

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However, the rate of inflation, which has increased, affects expenses such as employee

compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period that we are bringing the product candidates to market.

To the extent inflation results in rising interest rates

and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations.

compensation, office space leasing costs and research and development charges, which may not be readily recoverable.

To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our

consolidated financial condition and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis