What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-12 · 58 added, 82 removed, 107 unchanged (57% of the section changed)

2 unchanged sentences

Executive Summary

We continued to realize significant revenue growth during the three months ended June 30, 2024 , as compared to the same period in 2023 .

Revenue for the three months ended June 30, 2024 , totaled $7.2 million, an increase of 53% , as compared to $4.7 million for the same period of 2023 .

Revenue for the six months ended June 30, 2024 , totaled $12.9 million, an increase of 53% , as compared to $8.5 million for the same period of 2023 .

Net income for the three months ended June 30, 2024 , was $6.6 million, or $0.01 per basic and diluted share, compared to a net loss of $7.3 million, or $0.01 per basic and diluted share, for the same period in 2023 .

The increase in our net income for the three months ended June 30, 2024 , was primarily related to an increase in operating income, a decrease in change of fair value of derivative liabilities, and a gain on the extinguishment of debt.

For the three months ended June 30, 2024 , our operating income totaled $2.0 million, which is an improvement of $1.1 million compared to the same period of 2023 .

Net income for the six months ended June 30, 2024 , was $2.0 million, or $0.00 per basic and diluted share, compared to a net loss of $20.4 million, or $0.04 per basic and diluted share, for the same period in 2023 .

The increase in our net income for the six months ended June 30, 2024 , was primarily related to an increase in operating income, a decrease in change of fair value of derivative liabilities, a gain on the extinguishment of debt, and a one-time receipt related to a patent license.

For the six months ended June 30, 2024 , our operating income totaled $0.9 million, which is an improvement of $2.0 million compared to the same period of 2023 .

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.

Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA was to be effected.

On June 25, 2024, we delivered a notice to SEPA terminating the Merger Agreement.

We are exploring alternative options to seek an uplisting to a national exchange, strengthen our financial position, and allow us to achieve a market valuation that we believe is commensurate to the fundamentals of the business.

We continued to realize significant revenue growth during the three months ended September 30, 2024 , as compared to the same period in 2023 .

Revenue for the three months ended September 30, 2024 , totaled $9.4 million, an increase of 89% , as compared to $5.0 million for the same period of 2023 .

Revenue for the nine months ended September 30, 2024 , totaled $22.3 million, an increase of 66% , as compared to $13.4 million for the same period of 2023 .

Net loss for the three months ended September 30, 2024 , was $20.7 million compared to a net loss of $23.7 million for the same period in 2023 .

The decrease in our net loss for the three months ended September 30, 2024 , was primarily related to an increase in operating income and a decrease in change of fair value of derivative liabilities.

For the three months ended September 30, 2024 , our operating income totaled $2.0 million, which is an improvement of $2.5 million compared to the same period of 2023 .

Net loss for the nine months ended September 30, 2024 , was $18.6 million, compared to a net loss of $44.0 million for the same period in 2023 .

The decrease in our net loss for the nine months ended September 30, 2024 , was primarily related to an increase in operating income, a decrease in change of fair value of derivative liabilities, a gain on the extinguishment of debt, and a one-time receipt related a third-party license and option agreement.

For the nine months ended September 30, 2024 , our operating income totaled $2.9 million, which is an improvement of $4.5 million compared to the same period of 2023 .

All share numbers, including the number of shares underlying warrants, options and convertible debt, and per share amounts presented in these financial statements, including these footnotes reflect a one-for-three hundred seventy five (1:375) reverse stock split of the Company's common stock effected on October 18, 2024 (the "Reverse Stock Split").

The Company's authorized shares of common and preferred stock along with the par value did not change.

No fractional shares will be issued as a result of the reverse stock split.

Any fractional shares that would have resulted from the reverse stock split will be settled in cash.

The reverse stock split will affect all common stockholders uniformly and will not alter any stockholder's percentage interest in the Company's common stock, except to the extent that the reverse stock split results in some stockholders experiencing an adjustment of a fractional share as described above.

Non-GAAP Financial Measures

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.

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.

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 U.S.

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

believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of management, and to better understand its historical and future financial performance.

These non-GAAP financial measures are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other U.S.

The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of management, and to better understand its historical and future financial performance.

non-GAAP financial measures are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other U.S.

GAAP measures.

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As presented in the U.S.

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2024 2023 2024 2023

2024 2023 2024 2023

Net Income/(Loss) $ (20,657) $ (23,700) $ (18,624) $ (44,042)

$ 6,561 $ (7,262) $ 2,033 $ (20,342)

Non-GAAP Adjustments:

Interest expense 3,661 3,845 11,004 12,504

3,783 4,381 7,343 8,659

Depreciation and amortization 256 266 736 780

262 257 480 515

10,606 (2,624) 9,856 (11,168)

EBITDA (16,740) (19,589) (6,884) (30,758)

Non-GAAP Adjustments for Adjusted EBITDA:

Change in fair value of derivative liabilities 18,849 19,325 17,633 29,943

(3,717) 3,821 (1,216) 10,618

Other non-cash or non-recurring charges:

Gain on extinguishment of debt - - (5,205) -

(5,310) - (5,205) -

Severance agreement and legal settlement - - 585 -

Release of historical accrued expenses - - (579) (1,250)

(579) (1,250) (579) (1,250)

Shares for services - - - 224

License and option agreement - - (2,500) -

- - (2,500) -

Prepaid legal fees expensed from termination of Merger Agreement - - 457 -

457 $ - $ 457 $ -

Adjusted EBITDA $ 2,109 $ (264) $ 3,507 $ (1,841)

$ 1,457 $ 171 $ 1,398 $ (1,576)

Results of Operations

For the Three Months Ended For the Six Months Ended

June 30, Change

For the Three Months Ended For the Nine Months Ended

September 30, Change September 30, Change

(in thousands) 2024 2023 $ % 2024 2023 $ %

Total Revenue $ 9,360 $ 4,953 $ 4,407 89 % $ 22,308 $ 13,404 $ 8,904 66 %

$ 7,162 $ 4,675 $ 2,487 53 % $ 12,948 $ 8,450 $ 4,498 53 %

Cost of Revenues 2,293 1,412 881 62 % 5,799 3,876 1,923 50 %

1,922 1,202 720 60 % 3,506 2,464 1,042 42 %

5,240 3,473 1,767 51 % 9,442 5,986 3,456 58 %

Gross Margin 7,067 3,541 3,526 100 % 16,509 9,528 6,981 73 %

73 % 74 % (112) bps 73 % 71 % 208 bps

Gross Margin % 76 % 71 % 401 bps 74 % 71 % 292 bps

Operating Expenses:

General and administrative 2,545 2,681 (136) (5 %) 8,059 6,678 1,381 21 %

1,839 1,238 601 49 % 5,514 3,997 1,517 38 %

Selling and marketing 2,202 1,039 1,163 112 % 4,468 3,430 1,038 30 %

1,034 978 56 6 % 2,266 2,390 (124) -5 %

Research and Development 161 165 (4) -2 % 519 436 83 19 %

195 139 56 40 % 358 270 88 33 %

Depreciation and amortization 206 187 19 10 % 568 563 5 1 %

180 187 (7) -4 % 362 376 (14) -4 %

Operating Income (Loss) 1,953 (531) 2,484 -468 % 2,895 (1,579) 4,474 283 %

1,992 931 1,061 114 % 942 (1,047) 1,989 190 %

Other Income (Expense) (22,610) (23,169) 559 2 % (21,519) (42,463) 20,944 49 %

4,569 (8,193) 12,762 156 % 1,091 (19,295) 20,386 106 %

Net Income (Loss) $ (20,657) $ (23,700) $ 3,043 13 % $ (18,624) $ (44,042) $ 25,418 58 %

$ 6,561 $ (7,262) $ 13,823 190 % $ 2,033 $ (20,342) $ 22,375 110 %

Revenues and Gross Margin

Revenues for the three month-period ended June 30, 2024 , were $7.2 million compared to $4.7 million for the same period of 2023 , an increase of $2.5 million, or 53% .

Revenues for the three month-period ended September 30, 2024 , were $9.4 million compared to $5.0 million for the same period of 2023 , an increase of $4.4 million, or 89% .

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 26% year over year, and the remainder of the growth was related to an increase in the number of consumables and systems sold year over year.

Gross margin as a percentage of revenue decreased to 73% during the three months ended June 30, 2024 , from 74% in the same period of 2023 .

Revenues for the six month-period ended June 30, 2024 , were $12.9 million compared to $8.5 million for the same period of 2023 , an increase of $4.5 million, or 53% .

The increase in revenues was partially due to an increase in the average selling price of our consumables and parts revenue of 26% year over year, and the remainder of the growth was related to an increase in the number of consumables and systems sold year over year.

Gross margin as a percentage of revenue increased to 76% during the three months ended September 30, 2024 , from 71% in the same period of 2023 .

Revenues for the nine month-period ended September 30, 2024 , were $22.3 million compared to $13.4 million for the same period of 2023 , an increase of $8.9 million, or 66% .

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 year over year, and the remainder of the growth was related to an increase in the number of consumables and systems sold year over year.

Gross margin as a percentage of revenue increased to 73% during the six months ended June 30, 2024 , from 71% in the same period of 2023 .

Gross margin as a percentage of revenue increased to 74% during the nine months ended September 30, 2024 , from 71% in the same period of 2023 .

General and Administrative Expenses

General and administrative expenses increased $0.6 million or 49% for the three months ended June 30, 2024 , compared with the same period of 2023 .

The increase for the three months ended June 30, 2024 , was primarily due to increased headcount expenses.

General and administrative expenses increased $1.5 million, or 38%, for the six months ended June 30, 2024 , compared with the same period of 2023 .

The increase for the six months ended June 30, 2024 , was primarily due to severance costs, a non-recurring legal settlement, and increased headcount expenses.

General and administrative expenses decreased $0.1 million or 5% for the three months ended September 30, 2024 , compared with the same period of 2023 .

The decrease for the three months ended September 30, 2024 , was primarily due to a decrease in insurance and consulting costs.

General and administrative expenses increased $1.4 million, or 21%, for the nine months ended September 30, 2024 , compared with the same period of 2023 .

The increase for the nine months ended September 30, 2024 , was primarily due to severance costs, a non-recurring legal settlement, increased headcount expenses.

Selling and Marketing Expenses

Selling and marketing expenses increased by $0.1 million, or 6%, for the three months ended June 30, 2024 , as compared with the same period of 2023 .

The increase was primarily due to increased travel expenses as the sales team and activity grew in comparison to the same period of 2023 .

Selling and marketing expenses decreased by $0.1 million, or 5%, for the six months ended June 30, 2024 , as compared with the same period of 2023 .

The decrease was primarily due to severance payments in the six months ended June 30, 2023, that did not recur during the same period of 2024.

Selling and marketing expenses increased by $1.2 million, or 112%, for the three months ended September 30, 2024 , as compared with the same period of 2023 .

The increase was primarily due to increased head count and commission expenses as the sales team and activity grew in comparison to the same period of 2023 .

Selling and marketing expenses increased by $1.0 million, or 30%, for the nine months ended September 30, 2024 , as compared with the same period of 2023 .

The increase was primarily due to increased head count and commission expenses as the sales team and activity grew in comparison to the same period of 2023 .

Research and Development Expenses

Research and development expenses increased $0.1 million, or 40%, for the three months ended June 30, 2024 , as compared with the same period of 2023 .

Research and development expenses as a percentage of revenue stayed flat at 3% during the three months ended June 30, 2024 , and for the same period in 2023 .

Research and development expenses increased $0.1 million, or 33%, for the six months ended June 30, 2024 , as compared with the same period of 2023 .

Research and development expenses as a percentage of revenue stayed flat at 3% during the six months ended June 30, 2024 , and for the same period in 2023 .

Research and development expenses decreased slightly for the three months ended September 30, 2024 , as compared with the same period of 2023 .

Research and development expenses as a percentage of revenue decreased to 1.7% during the three months ended September 30, 2024 , compared to 3.3% for the same period in 2023 .

Research and development expenses increased $83,000, or 19%, for the nine months ended September 30, 2024 , as compared with the same period of 2023 .

Research and development expenses as a percentage of revenue decreased to 2.3% during the nine months ended September 30, 2024 , compared to 3.2% for the same period in 2023 .

Other (Expense)/Income, net

Three months ended June 30, Change

Six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

(in thousands) 2024 2023 $ % 2024 2023 $ %

Interest expense $ (3,661) $ (3,845) $ 184 5 % $ (11,004) $ (12,504) $ 1,500 12 %

1 unchanged sentence

Change in fair value of derivatives (18,849) (19,325) 476 2 % (17,633) (29,943) 12,310 41 %

Other income (expense) (675) 9 (684) nm 2,013 (18) 2,031 nm

Other income (expense), net $ 4,569 $ (8,193) $ 12,762 156 % $ 1,091 $ (19,295) $ 20,386 106 %

Other (expense) income (100) 1 (101) nm 1,913 (16) 1,929 nm

Other (expense), net $ (22,610) $ (23,169) $ 559 2 % $ (21,519) $ (42,463) $ 20,944 49 %

nm - not meaningful

Other income (expense), net increased by $12.8 million to $4.6 million for the three months ended June 30, 2024 , as compared to the same period for 2023 .

The change was primarily due to a decrease in change in fair value of derivatives expense of $7.5 million, recognition of a non-recurring gain on extinguishment of debt of $5.3 million, and partially offset by $0.5 million of deferred offering costs expense associated with the Merger Agreement and the termination thereof.

Other income (expense), net increased by $20.4 million to $1.1 million for the six months ended June 30, 2024 , as compared to the same period for 2023 .

The increase was primarily due to a decrease in change in fair value of derivatives expense of $11.8 million, recognition of a non-recurring gain on extinguishment of debt of $5.3 million and the receipt of $2.5 million from a third-party license and option agreement.

Other expense decreased by $0.6 million to $22.6 million for the three months ended September 30, 2024 , as compared to the same period for 2023 .

The change was primarily due to a decrease in change in fair value of derivatives expense of $0.5 million.

Other expense decreased by $20.9 million to $21.5 million for the nine months ended September 30, 2024 , as compared to the same period for 2023 .

The decrease was primarily due to a decrease in change in fair value of derivatives expense of $12.3 million, recognition of a non-recurring gain on extinguishment of debt of $5.3 million and the receipt of $2.5 million from a third-party license and option agreement.

Liquidity and Capital Resources

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

As of June 30, 2024 , we had an accumulated deficit of $218 million .

As of September 30, 2024 , we had an accumulated deficit of $239 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.

The events of default on our senior secured debt and working capital deficit 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 the UltraMIST and PACE systems which will require additional capital resources to remain a going concern.

Management’s plans may include obtaining additional capital in 2024.

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Statement of Cash Flows

For the six months ended June 30,

For the nine months ended September 30,

(in thousands) 2024 2023

Cash flows provided by (used in) operating activities $ 1,714 $ (3,253)

$ 432 $ (1,215)

Cash flows used in investing activities $ (254) $ (156)

$ (206) $ (169)

Cash flows provided by financing activities

$ 316 $ 1,426

Cash provided by operating activities during the six months ended June 30, 2024 , totaled $0.4 million as compared to cash used by operating activities of $1.2 million in the previous year period.

This improvement in cash provided by operations was primarily driven by the receipt of $2.5 million related to a license agreement and option agreement.

Cash flows provided by (used in) financing activities $ (119) $ 3,356

Cash provided by operating activities during the nine months ended September 30, 2024 , totaled $1.7 million as compared to cash used by operating activities of $3.3 million in the previous year period.

This improvement in cash provided by operations was primarily driven by the receipt of $2.5 million related to a license agreement and option agreement, the increase in revenues, and improvements in operations management including accounts receivable, inventory and accounts payable.

Critical Accounting Estimates

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The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to be separately accounted for.

The Company also determined that certain warrants also qualified as derivative financial instruments.

Various valuation models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the consolidated balance sheets.

The Company also further determined that certain warrants also qualified as derivative financial instruments.

Various valuation models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the condensed consolidated balance sheets.

The models include subjective input assumptions that can materially affect the fair value estimates and as such are subject to uncertainty.

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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.

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.

To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our condensed consolidated financial condition and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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