ASP Isotopes Inc.: Form 10-Q for the period ended Jun 30, 2024

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors,” our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward- looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We are a development stage advanced materials company dedicated to the development of technology and processes that, if successful, will allow for the enrichment of natural isotopes into higher concentration products, which could be used in several industries. Our proprietary technology, the Aerodynamic Separation Process (“ASP technology”), originally developed by Klydon Proprietary Ltd (“Klydon”), is designed to enable the production of isotopes used in several industries. Our initial focus is on the production and commercialization of enriched Carbon-14 (“C-14”), Molybdenum-100 (“Mo-100”) and Silicon-28 (“Si-28”). We have commissioned an isotope enrichment plant for the enrichment of C-14 located in Pretoria, South Africa, which will be ready for production upon the final installation of essential components, and we expect to start commercial supply of C-14 during the second half of 2024. We anticipate completion and commissioning of a multi-isotope enrichment plant in Pretoria, South Africa during the second half 2024, and we expect to start initial commercial supply of Si-28 during the second half 2024. In addition, we have started planning additional isotope enrichment plants. We believe the C-14 we may produce using the ASP technology could be used in the development of new pharmaceuticals and agrochemicals. We believe the Mo-100 we may produce using the ASP technology could have significant potential advantages for use in the preparation of nuclear imaging agents by radiopharmacies and others in the medical industry. We believe the Si-28 we may produce using the ASP technology may be used to create advanced semiconductors and in quantum computing. In addition, we are considering the future development of the ASP technology for the separation of Zinc-68, Xenon-129/136 for potential use in the healthcare end market, Germanium 70/72/74 for possible use in the semiconductor end market, and Chlorine -37 for potential use in the nuclear energy end market.

We are also developing Quantum Enrichment technology to produce enriched Ytterbium-176, Nickel-64, Lithium 6, Lithium7 and Uranium-235 (“U-235”). Quantum enrichment is an advanced isotope enrichment technique that is currently in development that uses lasers. We believe that the U-235 we may produce using quantum enrichment technology may be commercialized as a nuclear fuel component for use in the new generation of HALEU- fueled small modular reactors that are now under development for commercial and government uses. Our first quantum enrichment facility is expected to complete construction and commissioning during the fourth quarter 2024 with first commercial production of Yb-176 also expected during the fourth quarter 2024.

On November 15, 2022, we completed an IPO of our common stock and issued and sold 1,250,000 shares of common stock at a public offering price of $4.00 per share, resulting in net proceeds of $3.8 million after deducting underwriting discounts and commissions and offering expenses.

In March 2023, we issued 3,164,557 shares of our common stock at a purchase price of $1.58 per share and warrants to purchase up to an aggregate of 3,164,557 shares of our common stock with an exercise price of $1.75 per share for gross proceeds of $5.0 million. We incurred $506,390 in cash issuance costs and issued warrants to purchase up to an aggregate of 221,519 shares of common stock with an exercise price of $1.975 per share to the placement agent with an initial fair value of $179,116.

In October 2023, the Company entered into Securities Purchase Agreements with certain institutional and other accredited investors and certain directors of the Company to issue and sell an aggregate of 9,952,510 shares of the Company’s common stock, for aggregate cash consideration of $9,129,461, as follows: (i) 8,459,093 shares to investors at a purchase price per share of $0.9105, (ii) 1,190,239 shares to investors at a purchase price per share of $0.9548, and (iii) 303,178 shares to directors at a purchase price per share of $0.96. The Company incurred issuance costs equivalent to 5% of the gross proceeds from new investors which was settled in stock through the issuance of 472,582 shares to the placement agent and additional cash issuance costs totaling $57,083.

In March 2024, the Company’s wholly owned subsidiary Quantum Leap Energy received gross proceeds of $20,550,000 through the issuance of Convertible Promissory Notes with a stated interest rate of 6% for the first year and 8% thereafter. The maturity date of the Convertible Promissory Notes is March 7, 2029. The Convertible Promissory Notes automatically convert into common shares upon Quantum Leap Energy’s closing of an IPO or other qualifying public transaction at 80% of the share price taking into consideration a valuation cap.

In April 2024, the Company received approximately $5.5 million from the issuance of 3,164,557 shares of common stock upon the exercise of warrants.

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In July 2024, the Company issued 13,800,000 in a public offering at a public offering price of $2.50 per share resulting in net proceeds of approximately $32.3 million after deducting underwriting discounts, commissions and offering expenses.

Acquisition of 51% of PET Labs Pharmaceuticals

In October 2023, the Company entered into a Share Purchase Agreement with Nucleonics Imaging Proprietary Limited, a company incorporated in South Africa, to purchase 51% of the ordinary shares in Nucleonics’ wholly-owned subsidiary, Pet Labs Pharmaceuticals Proprietary Limited, a company incorporated in South Africa and dedicated to nuclear medicine and the science of radiopharmaceutical production.

Per the Share Purchase Agreement, the Company has agreed to pay a total of $2,000,000 for the shares in two installments. The first installment of $500,000 was paid in November 2023. In January 2024, the Company paid $264,750 towards the balance due. The remaining balance of $1,235,250 is due upon demand any time after October 31, 2024 and is expected to be paid in November 2024.

Acquisition of Assets and Agreements with Klydon

To date, we have purchased certain assets of Molybdos Proprietary Limited, a South Africa company (Molybdos), and entered into a number of agreements with Klydon (Pty) Limited, a South Africa company (Klydon). Below is a summary of the key terms for our former licenses and other agreements with Klydon.

Acquisition of Molybdos Assets. On September 30, 2021, our subsidiary, ASP Isotopes South Africa (Proprietary) Limited (“ASP South Africa”), participated in and was declared the winner of a competitive auction process under Section 45 of the South Africa Consumer Protection Act, 2008 related to the sale and assignment of the assets of Molybdos (the “Molybdos Business Rescue Auction”). On October 12, 2021, ASP South Africa acquired the assets of Molybdos for ZAR 11,000,000 (which at the then current exchange rate was approximately $734,000), plus value added tax (VAT) levied by the government of South Africa at the rate of 15% and auctioneers’ commission at the rate of 10%.

Acquisition of Silicon-28 Plant Assets. On July 26, 2022, we acquired assets comprising a dormant Silicon-28 aerodynamic separation processing plant from Klydon for ZAR 6,000,000 (which at the then current exchange rate was approximately $364,000), which will be payable to Klydon on the later of 180 days of the acquisition and the date on which the assets generate any revenues of any nature.

Exclusive Mo-100 License (superseded and replaced by new license (see “Omnibus Klydon License” below)). On September 30, 2021, ASP South Africa, as licensee, entered into a license with Klydon, as licensor, pursuant to which ASP South Africa acquired from Klydon an exclusive license to use, subcontract and sublicense certain intellectual property rights relating to the ASP technology for the development and/or otherwise disposing of the ASP technology and production, distribution, marketing and or sale of Mo-100 isotope produced using the ASP technology (as amended on June 8, 2022, the “Mo-100 license”). The intellectual property rights granted to us through the Mo-100 license included all existing and/or future proprietary rights of Klydon relating to the ASP technology, whether or not such rights have been registered, including the copyright, designs, know-how, patents and trademarks (although Klydon currently has no such patents, patent applications or copyrights). The exclusive Mo-100 license was royalty-free, had a term of 999 years and was for the global development of the ASP Technology and production of the Mo-100 Isotope and global for the distribution, marketing and sale of the Mo-100 Isotope. No upfront or other payment was made or is owed in connection with the Mo-100 license. Klydon had the right to terminate the exclusivity of the Mo-100 license in the event that the licensee ceased carrying on activities of Mo-100 enrichment for a period longer than 24 consecutive months. Klydon had no other rights to terminate the Mo-100 license. Effective July 26, 2022, the parties agreed to terminate the Mo-100 license, which was superseded and replaced by a new license agreement (described under the heading “Omnibus Klydon License” below).

Exclusive U-235 License (superseded and replaced by new license (see “Omnibus Klydon License” below)). On January 25, 2022, ASP South Africa, as licensee, entered into a license with Klydon, as licensor, pursuant to which ASP South Africa acquired from Klydon an exclusive license to use, subcontract and sublicense certain intellectual property rights relating to the ASP technology for the development and/or otherwise disposing of the ASP technology and production, distribution, marketing and or sale of U-235 produced using the ASP (as so amended, the “U-235 license”). The intellectual property rights granted to us through the U-235 license included all existing and/or future proprietary rights of Klydon relating to the ASP technology, whether or not such rights have been registered, including the copyright, designs, know-how, patents and trademarks (although Klydon currently has no such patents, patent applications or copyrights). The exclusive U-235 license had a term of 999 years and was for the global development of the ASP technology and production of U-235 and global for the distribution, marketing and sale of U-235. In connection with the U-235 license we made an upfront payment of $100,000 and agreed to pay certain royalties (the greater of $50 per k.g. of U-235 and 10% of profits) and a 33% sublicensing revenue share of any cash consideration we may receive for any sublicenses we may grant. Klydon had the right to terminate the exclusivity of the U-235 license in the event that the licensee ceased carrying on activities of U-235 enrichment for a period longer than 24 consecutive months. Klydon had no other rights to terminate the U-235 license. Effective July 26, 2022, the parties agreed to terminate the U-235 license, which was superseded and replaced by a new license agreement (described under the heading “Omnibus Klydon License” below).

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Omnibus Klydon License. On July 26, 2022, ASP Isotopes UK Ltd, as licensee, entered into a license agreement with Klydon, as licensor, pursuant to which ASP Isotopes UK Ltd acquired from Klydon an exclusive license to use, develop, modify, improve, subcontract and sublicense certain intellectual property rights relating to the ASP technology for the production, distribution, marketing and sale of all isotopes produced using the ASP technology (the “Klydon license agreement”). The intellectual property rights granted to us through the Klydon license agreement included all existing and/or future proprietary rights of Klydon relating to the ASP technology, whether or not such rights have been registered, including the copyright, designs, know-how, patents and trademarks (although Klydon currently has no such patents, patent applications or copyrights). The Klydon license agreement was royalty-free, had a term of 999 years and was worldwide for the development of the ASP technology and the distribution, marketing and sale of isotopes. Future production of isotopes is limited to member countries of the Nuclear Suppliers Group. In connection with the Klydon license agreement, we agreed to make an upfront payment of $100,000 (to be included within the payments we made under the Turnkey Contract (described below) and deferred payments of $300,000 over 24 months. Effective April 4, 2023, pursuant to the Acknowledgement of Debt Agreement described below, we acquired the ASP technology, among other things, from Klydon, and the Klydon license agreement is no longer in effect.

Turnkey Contract. On November 1, 2021, ASP South Africa and Klydon, as the contractor, entered into a contract under which Klydon has been appointed to supply to ASP South Africa a complete turnkey isotope enrichment plant (the “Turnkey Contract”). The activities to be undertaken or performed by Klydon include: taking control of the assets acquired in the Molybdos Business Rescue Auction; the design of an isotope enrichment facility; the supply of components, equipment and labor required for the construction; the installation, testing and commissioning of the isotope enrichment plant; securing all required approvals, regulatory authorizations and other required consents for the operation of the plant; providing training to local ASP Isotopes South Africa (Proprietary) Limited personnel to enable them to operate the plant going forward; and providing warranties in relation to the performance targets of the plant which are required to be met. Klydon was responsible for liaising with the relevant South African authorities, including the South African Non Proliferation Council, the Nuclear Suppliers Group and International Atomic Energy Agency to ensure that the Turnkey Contract and the isotope enrichment plant are compliant with international laws and guidelines.

Acknowledgement of Debt Agreement. Klydon performed a portion of the services required under the Turnkey Contract described above; however, services were incomplete and many of the services were not completed within the time frame required. As a result, Klydon and ASP South Africa entered into an Acknowledgement of Debt Agreement dated November 30, 2022, whereby Klydon (i) agreed to pledge its assets (the “Pledged Assets”) to ASP South Africa to secure its performance of the Turnkey Contract by December 31, 2022, and (ii) acknowledged that ASP South Africa would suffer damages in the amount of $6,050,000 (“Damage Amount”) should it fail to perform. Under the Acknowledgement of Debt Agreement, the Pledged Assets would serve as collateral for Klydon’s obligation to pay the Damage Amount should Klydon fail to perform. In connection therewith, also on November 30, 2022, ASP South Africa and Klydon entered into a Deed of Security Agreement whereby, if Klydon failed to complete its obligations under the Turnkey Contract by December 31, 2022, all of Klydon’s rights of any nature to and interests of any nature in the Pledged Assets would be transferred to ASP South Africa. Klydon failed to complete its obligations under the Turnkey Contract by December 31, 2022.

On April 4, 2023, the Company perfected its interests in the assets under the Acknowledgement of Debt Agreement, pursuant to which the Company acquired the Pledged Assets, including certain intellectual property, from Klydon and settled all amounts due to Klydon, including the ZAR 6,000,000 for the acquisition of the Silicon-28 plant assets.

Other Commercial Agreements

Below is a summary of the key terms of our other commercial agreements.

Lease for Molybdenum Processing Plant. On October 12, 2021, ASP South Africa entered into an agreement of lease with the landlord of the facility located at 33 Eland Street, Koedoespoort Industrial, Pretoria where we operate our Molybdenum processing plant where gaseous Molybdenum compound will be treated (which process comprises several stages of compression and expansion during which the product is purified). The term of the lease ends on December 31, 2030.

Lease for additional production space. On April 1, 2023, ASP South Africa entered into an agreement of lease with the landlord of facility located in Pretoria where we plan to perform production activities. The initial term of the lease was set to end on March 31, 2024. The Company entered into a new agreement of lease with the landlord. The terms of the new lease ends on February 28, 2026.

Lease for additional laboratory space. On November 1, 2023, ASP South Africa entered into an agreement of lease with the landlord of the facility located in Pretoria where we perform research and development activities. The term of the lease ends on October 30, 2026.

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Lease for PET Labs Pharmaceutical operations. Commencing with our acquisition of PET Labs Pharmaceuticals in October 2023, this facility has an initial term set to expire in March 2026 with automatic monthly extensions thereafter. This space is used for office and production activities.

Lease for additional PET Labs Pharmaceutical operations. Commencing with our acquisition of PET Labs Pharmaceuticals in October 2023, this facility had an initial term which expired in December 2023 and is currently under automatic monthly extensions. This space is used for production activities.

Political Risk Insurance Policy with Optio Group. On October 25, 2021, ASP Guernsey entered into a contract of insurance to cover against political risk and expropriation, to off-set the risk of events detrimental to the company occurring in the Republic of South Africa for a period of three years. The insurer is Optio Group Limited which is 100% underwritten by one or more syndicates at Lloyd’s of London. The specific risks covered in the policy are: (i) permanent and total abandonment of operations, (ii) deprivation of assets or shareholding, (iii) physical damage due to political violence, (iv) non-transfer or inconvertibility, (v) business interruption, (vi) non-honouring of arbitration award, and (vii) crisis management support. The limit of cover is equal to or in excess of the projected amount of investment required to complete the initial stage of the first planned Molybdenum enrichment plant. The limit of cover is capable of being increased and extended by mutual agreement with the insurer.

Components of Results of Operations

Revenue

Effective with the acquisition of 51% of PET Labs Pharmaceuticals, the Company recognizes revenue from the sale of nuclear medical doses for PET scanning.

Cost of Goods Sold

Cost of goods sold associated with the sale of nuclear medical doses for PET scanning consist of labor, delivery and materials.

Operating Expenses

Our operating expenses consist of (i) research and development expenses and (ii) selling, general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the development activities for our future isotopes.

Direct costs include:

• external research and development expenses; and
• costs related to designing the development processes of isotope production.

Indirect costs include:

• personnel-related costs, which include salaries, payroll taxes, employee benefits, and other employee-related costs, including stock-based compensation, for personnel engaged in research and development functions; and
• facilities and other various expenses.

Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

As described above, Klydon charged us for expenses associated with these research and development functions under the Turnkey Contract. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue the development of our future isotopes. We cannot determine with certainty the timing of initiation, the duration or the completion costs of development activities. Actual development timelines, the probability of success and development costs can differ materially from expectations.

We may need to raise substantial additional capital in the future. In addition, we cannot forecast which future isotopes may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

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Our research and development expenses may vary significantly based on a variety of factors, such as:

• the scope, rate of progress, expense and results of our development activities;
• the phase of development of our future isotopes;
• the timing, receipt, and terms of any approvals from applicable regulatory authorities including the FDA and foreign regulatory authorities;
• significant and changing government regulation and regulatory guidance;
• the cost and timing of designing the development processes of isotope production;
• the extent to which we establish additional strategic collaborations or other arrangements; and
• the impact of any business interruptions to our operations or to those of the third parties with whom we work.

A change in the outcome of any of these variables with respect to the development of any of our future isotopes could significantly change the costs and timing associated with the development of that future isotope.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of personnel-related costs, which include salaries, payroll taxes, employee benefits, and other employee-related costs, including stock-based compensation, for personnel in executive, sales, finance and other administrative functions. Other significant costs include legal fees relating to corporate matters, professional fees for accounting and consulting services and facility-related costs.

We expect that our ongoing selling, general and administrative expenses will increase substantially for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company and in building our internal resources. These increased costs will include increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor and public relations costs associated with operating as a public company.

Segment Information

As of December 31, 2023, we managed our operations as a single segment, specialist isotopes and related services. Beginning in 2024, primarily as a result of the increased business activities of our subsidiary, Quantum Leap Energy LLC, we have two operating segments: (i) nuclear fuels, and (ii) specialist isotopes and related services.

The nuclear fuels segment is focused on research and development of technologies and methods used to produce high-assay low-enriched uranium (HALEU) and Lithium-6 for the advanced nuclear fuels target end market.

The specialist isotopes and related services segment is focused on research and development of technologies and methods used to separate high-value, low-volume isotopes (such as C-14, Mo-100 and Si-28) for highly specialized target end markets other than advanced nuclear fuels, including pharmaceuticals and agrochemicals, nuclear medical imaging and semiconductors, as well as services related to these isotopes, and this segment includes PET Labs Pharmaceuticals.

The financial information is regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources. The Company’s CODM is its chief executive officer.

The Company manages assets on a total company basis, not by operating segment, as the assets are shared or commingled. Therefore, the chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, asset information is not reported on a segment basis.

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Select income statement information as of the three months ended June 30, 2024 and 2023 is as follows:

Select income statement information as of the six months ended June 30, 2024 and 2023 is as follows:

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the three months ended June 30, 2024 and 2023:

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Revenue and Cost of Goods Sold

Effective with the acquisition of 51% of PET Labs Pharmaceuticals, the Company has recognized revenue from the sale of nuclear medical doses for PET scanning for the two month period since the acquisition was effective on October 31, 2023 and December 31, 2023 and the three and six months ended June 30, 2024. In addition, the Company has recognized the related cost of goods sold, operating expenses and other income and expenses of PET Labs Pharmaceuticals for the same periods. No revenue or cost of goods sold was recognized for the three months ended June 30, 2023.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2024 and 2023:

Research and development expenses were $473,302 for the three months ended June 30, 2024. These expenses include $149,020 of personnel-related costs, including $81,721 in stock-based compensation, $174,490 in consulting and professional costs, $88,344 in facility expenses and $61,448 in other expenses.

Research and development expenses were $252,880 for the three months ended June 30, 2023. These expenses include $133,409 of personnel-related costs, including $93,409 in stock-based compensation, and $50,000 in consulting and professional costs, and $69,471 in facility expenses.

The increase in personnel-related costs is primarily attributable to the increase in headcount. The increase in consulting and professional costs is due to increased outsourced development activity for new specialty isotopes. The increase in facility and other is due to increase in space dedicated to development.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $7,405,178 for the three months ended June 30, 2024. These expenses include $1,176,113 of personnel-related costs, $2,436,295 in stock-based compensation, $1,484,255 of professional services and legal related fees and $2,308,515 in facility and other corporate expenses.

Selling, general and administrative expenses were $4,094,664 for the three months ended June 30, 2023. These expenses include $2,895,595 of personnel-related costs, $2,281,277 in stock-based compensation, $743,389 of professional services and legal related fees and $455,680 in facility and other corporate expenses.

The increase in personnel-related costs is due to an increase in headcount and salaries. The increase in stock-based compensation is due to the timing of the vesting of awards. The increase in professional services and legal related fees is primarily attributable to the timing of corporate activity. The increase in facility and other corporate expenses is primarily attributable to the expansion of our operations in 2024 and commission and fee expenses related to the issuance of convertible notes payable.

Other Income and Expense

Other expense for the three months ended June 30, 2024 was $1,410,217, which includes a $164,000 change in the fair value of the share liability related to the shares issuable to a consultant and a $1,574,816 change in fair value of the convertible notes payable issued in March and June 2024.

Other income for the three months ended June 30, 2023 was $61,198, which includes a $60,100 change in the fair value of the share liability related to the shares issuable to a placement agent and other consultants.

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Comparison of the Six Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023:

Revenue and Cost of Goods Sold

Effective with the acquisition of 51% of PET Labs Pharmaceuticals, the Company has recognized revenue from the sale of nuclear medical doses for PET scanning for the two month period since the acquisition was effective on October 31, 2023 and December 31, 2023 and the three and six months ended June 30, 2024. In addition, the Company has recognized the related cost of goods sold, operating expenses and other income and expenses of PET Labs Pharmaceuticals for the same periods. No revenue or cost of goods sold was recognized for the six months ended June 30, 2023.

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2024 and 2023:

Research and development expenses were $688,436 for the six months ended June 30, 2024. These expenses include $304,625 of personnel-related costs, including $164,784 in stock-based compensation, $174,490 in consulting and professional, and $209,321 in facility and other expenses.

Research and development expenses were $460,214 for the six months ended June 30, 2023. These expenses include $255,800 of personnel-related costs, including $185,800 in stock-based compensation, and $204,414 in consulting, facility and other expenses.

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The increase in personnel-related costs is mainly due to the increase in headcount and related costs. The increase in consulting and professional is due to increased outsourced development activity for new specialty isotopes. The increase in facility is due to increase in space dedicated to development.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $13,283,724 for the six months ended June 30, 2024. These expenses include $1,996,363 of personnel-related costs, $4,066,886 in stock-based compensation, $3,657,175 of professional services and legal related fees and $3,563,300 in facility and other corporate expenses.

Selling, general and administrative expenses were $7,612,154 for the six months ended June 30, 2023. These expenses include $903,374 of personnel-related costs, $4,332,985 in stock-based compensation, $1,496,808 of professional services and legal related fees and $878,987 in facility and other corporate expenses.

The increase in personnel-related costs is due to an increase in headcount and salaries. The increase in stock-based compensation is due to the timing of the vesting of awards. The increase in professional services and legal related fees is mainly due to the timing of corporate activity. The increase in facility and other corporate expenses is mainly due to the expansion of our operations in 2024 and commission and fee expenses related to the issuance of convertible notes payable.

Other Income and Expense

Other expense for the six months ended June 30, 2024 was $2,607,870, which includes a $54,000 change in the fair value of the share liability related to the shares issuable to a consultant and a $2,528,526 change in fair value of the convertible notes payable issued in March and June 2024.

Other income for the six months ended June 30, 2023 was $170,944, which includes a $170,385 change in the fair value of the share liability related to the shares issuable to a placement agent and other consultants.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred net losses and negative cash flows from operations since our inception, and we expect to continue to incur significant and increasing net losses for the foreseeable future. We have principally financed our operations to date through the issuance of our common stock, including our IPO, subsequent common stock offerings and the issuance of convertible notes payable. In July 2024, the Company issued 13,800,000 in a public offering at a public offering price of $2.50 per share resulting in net proceeds of approximately $32.3 million after deducting underwriting discounts, commissions and offering expenses.

As of June 30, 2024, we had cash and cash equivalents of $28.3 million. We have not generated any revenue from the sale of our enriched isotopes, and our ability to generate product revenue from the sale of enriched isotopes sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current or future enriched isotopes.

Effective with the acquisition of 51% of PET Labs Pharmaceuticals on October 31, 2023, we have begun to recognize revenue from the sale of nuclear medical doses for PET scanning in South Africa. Our ability to generate product revenue from the sale of nuclear medical doses for PET scanning sufficient to achieve profitability will depend on the successful expansion of production capabilities and commercialization of the results of that expansion.

Future Funding Requirements

Based on our current operating plan, we estimate that our existing cash and cash equivalents, along with gross proceeds of $34.5 million received in July 2024 from the issuance of common stock, will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months from the date the financial statements are issued. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of developing isotopes is costly, and the timing of progress and expenses in these development activities is uncertain.

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Our future capital requirements will depend on many factors, including:

• the type, number, scope, progress, expansions, results, costs and timing of, our development activities for our future isotopes;
• the outcome, timing and costs of regulatory review of our future isotopes;
• the costs and timing of manufacturing for our future isotopes;
• our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
• the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;
• the costs and timing of establishing or securing sales and marketing and distribution capabilities, whether alone or with third parties, to commercialize future isotopes for which we may obtain regulatory approval, if any;
• our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
• the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
• the costs of obtaining, expanding, maintaining and enforcing our patent and other intellectual property rights; and
• costs associated with any products or technologies that we may in-license or acquire.

Developing isotopes is a time-consuming, expensive and uncertain process that takes years to complete, and we may never achieve the necessary results required or obtain applicable regulatory approval for any isotopes or generate revenue from the sale of any future isotopes (assuming applicable regulatory approval is received). In addition, our future isotopes (assuming applicable regulatory approval is received) may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of isotopes that we do not expect to be commercially available in substantial quantities until at least the second half of 2024. If we receive permits and licenses to enrich U-235 (which in itself is highly uncertain), we do not expect U-235 to be commercially available for at least several years, if ever. As a result, we may need substantial additional financing to support our continuing operations and further the development of and commercialization of our future isotopes.

Expansion of the production and distribution of nuclear medical doses for PET scanning is a time-consuming, expensive and uncertain process that may take years to complete. As a result, we may need substantial additional financing to support our continuing operations and further the development of and commercialization of future nuclear medical doses for PET scanning.

Until such time as we can generate significant revenue from sales of our future isotopes or nuclear medical doses for PET scanning, if ever, we expect to finance our cash needs through public or private equity or debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting severely diminished liquidity and credit availability, increased interest rates, inflationary pressures, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our future isotopes, future revenue streams or research programs or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our future isotopes even if we would otherwise prefer to develop and market such isotopes ourselves.

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Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

Operating Activities

Net cash used in operating activities was $8,095,256 for the six months ended June 30, 2024 and was primarily due to our net loss of $15,846,286, adjusted for stock-based compensation expense of $4,231,670, non-cash issuance costs for the convertible notes payable of $621,915, amortization of right-of-use asset of $217,997, issuance of common stock to a consultant with a fair value of $619,200, change in fair values of $2,582,526, change in deferred tax liabilities of $39,068 and a $734,590 change in our operating assets and liabilities.

Net cash used in operating activities was $2,701,890 for the six months ended June 30, 2023, and was primarily due to our net loss of $7,901,424, adjusted for stock-based compensation expense of $4,518,785, expense related to the issuance of common stock to consultants of $496,300 and amortization of right-of-use asset of $32,553, partially offset by a change in fair value of share liability of $170,385 and partially offset by a $294,165 change in our operating assets and liabilities.

Investing Activities

Net cash used in investing activities was $3,867,903 for the six months ended June 30, 2024 and was comprised of the purchase of machinery and equipment, vehicles and construction in progress.

Net cash used in investing activities was $508,607 for the six months ended June 30, 2023 and was comprised of additional construction in progress.

Financing Activities

Net cash provided by financing activities was $32,414,967 for the six months ended June 30, 2024 and was comprised primarily of gross proceeds of $25,936,228 from the issuance of convertible notes payable, proceeds of $5,537,975 from the issuance of common stock for a warrant exercise, contributions from noncontrolling interest in VIE of $807,975, proceeds from collection of receivable from noncontrolling interest in VIE of $705,403, partially offset by payments of $438,569 on the note payable related to a financed corporate insurance policy, payment of principal portion of finance leases of $61,929 and distribution to noncontrolling interest in VIE of $27,116.

Net cash provided by financing activities was $4,493,610 for the six months ended June 30, 2023, and was comprised primarily of net proceeds of $4,493,610 from the sale and issuance of 3,164,557 shares of our common stock in March 2023.

Contractual Obligations and Commitments

We lease our main facility in Pretoria, South Africa under a lease with a base monthly rent payment of approximately $8,000 with a term expiring on December 31, 2030. We also lease additional space in Pretoria, South Africa under a lease with a base monthly rent payment of approximately $16,000 with a term that expires on February 28, 2026. We also lease additional space in Pretoria, South Africa under a lease with a base monthly rent payment of approximately $2,000 with a term expiring on October 30, 2026.

PET Labs Pharmaceuticals operates in a facility in Pretoria, South Africa is under a lease with a base monthly rent payment of approximately $28,000 with a term expiring on March 30, 2026 with automatic monthly extension afterwards. PET Labs Pharmaceuticals also rents space at a local hospital in Pretoria, South Africa for which there was a lease with a base monthly rent payment of approximately $5,000 which expired on December 31, 2023 and is currently in automatic monthly extensions.

In addition, we enter into contracts in the normal course of business with vendors for services and products for operating purposes. These contracts do not contain any minimum purchase commitments and generally provide for termination after a notice period and, therefore, are not considered long-term contractual obligations. Payments due upon cancellation consist only of payments for services provided and expenses incurred up to the date of cancellation.

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Off-balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Significant Judgments and Estimates

See Note 2 to our consolidated financial statements which discusses new accounting pronouncements.

We are a smaller reporting company as defined by Item 10 of Regulation S-K and are not required to provide the information otherwise required under this item.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, mean controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company on the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgement in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of a material weakness identified in our internal control over financial reporting, as previously disclosed in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2023, our disclosure controls and procedures were not effective as of June 30, 2024. In order to remediate the material weakness, management expects to hire additional accounting and finance resources or consultants with public company experience.

Changes in Internal Control

There has been no change in our internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Effective July 1, 2024, the Company has hired a new Chief Financial Officer in order to address the internal control environment.

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In addition to the other information set forth in this Form 10-Q, including under the heading “Cautionary Note Regarding Forward-Looking Statements,” the risks and uncertainties which could adversely affect our business, financial condition, results of operations and future growth prospects that we believe are most important for you to consider are discussed in “Part II, Item 1A—Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 10, 2024 and as amended by Forms 10-K/A filed with the SEC on April 29, 2024 and July 1, 2024. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2023 (as amended) are not the only risks we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2023 (as amended).