Empery Digital Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K, which contains audited financial statements of the Company as of and for the year ended December 31, 2023, previously filed with the Securities and Exchange Commission. Results for the three months ended March 31, 2024 are not necessarily indicative of results for the year ending December 31, 2024 or any future period.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.

In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance, including: our financial performance and projections; our growth in revenue and earnings; our product development and production releases; and our business prospects and opportunities. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “hopes” or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider various factors, including: our ability to change the direction of the Company; our ability to keep pace with new technology and changing market needs; and the competitive environment of our business. These and other factors may cause our actual results to differ materially from any forward-looking statement. Forward-looking statements are only predictions. The forward-looking events discussed in this document and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. We are not obligated to publicly update or revise any forward-looking statement, whether as a result of uncertainties and assumptions, the forward-looking events discussed in this document and other statements made from time to time by us or our representatives might not occur.

While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Form 10-Q describe additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations, and we do not intend to do so.

Forward-looking statements include, but are not limited to, statements about:

Overview

We are an all-electric, off-road powersports vehicle company developing electric two and four-wheel motorcycles and utility terrain vehicles, or UTVs, also known as side-by-sides, along with a line of upgrades and accessories. In October 2020, we began building and testing prototypes for our future offerings with two off-road motorcycles – the Grunt and the Runt. Our motorcycles feature unique frame designs protected by design patents. Additional utility and design patents have been filed for other aspects of Volcon’s vehicles.

Initially, we began to sell and distribute the Grunt and related accessories in the United States on a direct-to-consumer sales platform. However, we terminated our Grunt direct-to-consumer sales platform in November 2021. Beginning in November 2021, we began negotiating dealership agreements with powersports dealers to display and sell our vehicles and accessories. Customers can now, or will soon be able to, buy our vehicles and accessories directly from a local dealership. Some of these dealers will also provide warranty and repair services to customers. As of May 3, 2024, we have 105 active dealers. Dealers can order any of our available products provided they are current on their accounts receivable and are within their established credit limit. We are offering dealers payment terms 30 to 90 days to make larger purchases of our vehicles. We have entered into an accounts receivable factoring arrangement to allow the Company the ability to generate cash for working capital. We have agreements with third party financing companies to provide financing to qualified customers of each dealer. There is no recourse to the Company or the dealer if the dealer’s customer defaults on the financing agreement with the third party.

We sell our vehicles internationally through importers. Each importer buys vehicles by the container and sells vehicles and accessories to local dealers or directly to consumers. Local dealers or the importer will provide warranty and repair services for vehicles purchased in their country. In October 2023, we made a decision to postpone expanding our dealer network in Canada for the foreseeable future and we have terminated the employment of our Canadian regional sales managers. As of March 31, 2024, we have signed agreements with six importers in Latin America, one importer for the Caribbean Region, collectively referred to herein as the LATAM importers, one importer in New Zealand, and one importer in Australia to sell our vehicles and accessories in their assigned countries/markets. In 2024, we expect to expand our global sales of our vehicles and accessories beyond our current distributor base.

In June 2022, we signed an exclusive distribution agreement with Torrot Electric Europa S.A., referred to herein as Torrot, to distribute their electric motorcycles for youth riders in Latin America. In October 2022, we signed an expanded agreement with Torrot, which superseded the June 2022 agreement, to also be the exclusive distributor of Torrot and Volcon co-branded youth electric motorcycles in the U.S. as well as Latin America. Finally, in December 2022, we signed an expanded agreement with Torrot to be the exclusive distributor of Volcon co-branded youth electric motorcycles in Canada. In June 2023, we wrote down all remaining Torrot branded inventory in the amount of $84,000. In December 2023 we notified Torrot that we were terminating our agreements due to continued lower than expected sales at significantly discounted pricing. In 2023, we wrote down the Volcon co-branded Torrot youth motorcycles by $2,674,352 to reduce their cost to the estimated net realizable value due to lower than expected sales. We have agreed to give Torrot a total of 1,000 Volcon branded Torrot motorcycles originally purchased for $1.8 million, an up front payment of $370,000 and an additional $1.7 million to be paid out at $100,000 per month over 17 months beginning in April 2024 in exchange for unfulfilled 2023 and 2024 unit purchases. As of March 31, 2024, we have Volcon Youth finished goods inventory of approximately $175,000, after reducing these to the estimated net realizable value, of Volcon branded Torrot motorcycles and accessories which we intend to liquidate and we have agreed to give Torrot sales rights in the U.S., Canada and LATAM after June 30, 2024.

In July 2022, we expanded our offerings with the introduction of the first of our Volcon UTV models, the Stag. We delivered the first Stag to a customer in February 2024. The Stag is being manufactured by a third party and incorporates electrification units, which include batteries, drive units and control modules provided by General Motors. Beginning in June 2022, we took non-binding pre-production orders which were cancelable prior to delivery. In the third quarter of 2023 we canceled all of the original pre-production orders due to the introduction of multiple models and new pricing. We began taking new pre-production orders for the newly introduced models in the third quarter of 2023, which are limited to the Stag LTD as of March 31, 2024.

In August 2022, we ceased manufacturing of the Grunt and we outsourced the manufacturing of the remaining Grunts and the 2023 Grunt EVO to the same third party manufacturer as the Stag. The 2023 Grunt EVO has replaced the Grunt and has a belt drive rather than a chain drive as well as an updated rear suspension. We began selling the Grunt EVO in the third quarter of 2023.

We began taking pre-orders for an E-Bike, the Brat, in September 2022 and shipments to customers began in the fourth quarter of 2022. The Brat is being manufactured by a third party. In January 2023, we began selling the Brat directly to consumers through our website. Consumers who order the Brat from our website can have the Brat shipped to their specified destination.

After evaluating the sales potential for the Runt LT, we have determined that we will not sell this product and have ceased all development efforts for it.

The estimated fulfillment of all orders we have received assumes that our third party manufacturers can successfully meet our order quantities and deadlines. If they are unable to satisfy orders on a timely basis, our customers may cancel their orders.

In September and October 2023, we reduced our headcount in several departments to reduce costs and we continue to evaluate other cost reduction opportunities.

Results of Operations

The following financial information is for the three months ended March 31, 2024 and 2023.

Revenue

Revenue for the three months ended March 31, 2024, was $1,033,548 which represents sales of Grunt EVOs of $329,617, Stag of $39,999, Brats of $532,806, Volcon Youth of $93,757, and accessories and parts of $34,103.

Revenue for the three months ended March 31, 2023, was $1,170,458 which represents sales of Grunts of $170,388, Brats of $657,516, Volcon Youth of $212,365 and accessories and parts of $127,496.

Cost of Goods Sold

Cost of goods sold for the three months ended March 31, 2024 were $1,621,580, including payroll costs of $94,320, which was partially offset by a stock-based compensation benefit of $10,641, for employees performing product fulfillment, logistics management, and service and warranty. Product costs for Brats and Grunt EVOs, sold during the period were $582,550 and $343,981, respectively. Stag product costs were $228,893 which included costs for the one Stag sold in the amount of $43,412 and $10,429 for customized inventory related to the sale of the Stag. Also Included in the Stag product costs is $95,548 of expense related to accruing a loss on sales of units to a customer who initially ordered models that we will not be producing. The Company offered to substitute additional units of the Stag LTD at no additional charge to replace those units. Also relating to Stag costs is $52,503 in inbound freight and tariffs for Stag raw materials. Facilities costs for the three months ended March 31, 2024 were $105,950 for our warehouse facility and third party warehousing costs.

Cost of goods sold for the three months ended March 31, 2023 were $1,229,981 including labor costs of $402,104 for employees and contractors performing assembly and quality control testing of Grunts and stock-based compensation of $206,477 for share-based awards for employees. Part costs for Grunts sold during the period was $165,842. We paid $53,507 for fees owed to cancel purchase orders to reduce raw material quantities ordered to expected demand. Facilities costs were $122,311 for our warehouse facility and third party warehousing costs. Net inbound and outbound shipping costs, duties and tariffs for inventory purchases and shipments to customers was a credit of $278,774 primarily due to the reversal of an accrual for shipping costs and tariffs expected to be incurred to ship our Grunt raw materials and work-in-process inventory to our third party manufacturer in Mexico which was no longer needed once manufacturing was moved to Arizona.

For the remainder of 2024 we expect revenue and cost of goods sold, to increase due to the expected increase in sales of the Grunt EVO and Stag. Additional cost savings may be realized if the third party manufacturer can source or manufacture parts at a lower cost. The increase in costs for products will partially be offset by reductions in cost for salaries and benefits due to reductions in headcount completed in 2023.

Sales and Marketing Expense

Sales and marketing expenses relate to costs to increase exposure and awareness for our products and developing our network of U.S. dealers and international distributors.

Sales and marketing expenses were $760,564 for the three months ended March 31, 2024 and were primarily related to expenses associated with promoting our products and brand of $215,429, employee payroll costs of $453,191, including $112,500 for severance costs for our former chief marketing officer (“CMO”), which was partially offset by stock-based compensation benefit of $55,071 for cancelation of unvested share based awards to the CMO and other marketing employees whose positions were eliminated in the period and the CMO’s unvested share based awards.

For the three months ended March 31, 2023, sales and marketing expenses were $1,789,370 and include $588,321 for promoting our products and brand, $723,362 for employee payroll costs, stock-based compensation expense of $311,759 for share-based awards granted to employees and consultants, $38,452 related to facilities costs, and travel costs of $71,243 primarily related to costs incurred for travel to build our dealer and distributor network.

We also expect sales expenses to increase as we begin expanding our international distributors and selling commissions for increased sales of Grunt EVOs and the Stag offset by overall lower expenses as we seek to reduce costs.

Product Development Expense

Product development expenses relate to development and testing of our products and process to manufacture these products.

Product development expenses were $814,945 for the three months ended March 31, 2024 and were primarily related to expenses associated with employee payroll costs of $436,902, stock-based compensation of $42,604 for share-based awards granted to employees, facilities costs of $63,856, travel costs primarily related to beginning production of Stag of $53,326 and prototype costs of $91,925.

For the three months ended March 31, 2023, product development expenses totaled $1,786,351 and primarily relate to expenses associated with employee payroll costs of $507,676, stock-based compensation of $208,592 for share-based awards granted to employees and consultants, professional fees of $81,651 for digital consultants, $37,500 for recruiting fees, research and development costs of $266,829, prototype parts and tooling costs of $543,616, facilities cost of $47,823 and $50,634 for supplies, parts and software.

We expect 2024 product development costs related to employee costs to remain consistent with 2023. We expect costs to decrease for design and development costs and costs related to prototype costs for the current version of the Stag since the Stag is in production. We expect costs for design and development costs related to the Grunt EVO to decrease since it is in production. We expect design and development costs to increase for development of other versions of our UTV and motorcycle lineup being considered for future release.

General and Administrative Expense

General and administrative expenses relate to costs for our finance, accounting and administrative functions to support the development, manufacturing and sales of our products.

For the three months ended March 31, 2024, general and administrative expenses were $2,080,794 and were primarily related to expenses associated with employee payroll costs of $579,363, stock-based compensation of $21,187 for share-based awards granted to employees, professional fees of $412,715 (including legal fees of $195,377, tax and accounting fees of $23,200 and audit fees of $146,925), software costs of $141,551, insurance costs of $662,927, and public company expense costs of $102,721.

For the three months ended March 31, 2023, general and administrative expenses were $1,890,091 and were primarily related to expenses associated with employee payroll costs of $612,981, stock-based compensation of $330,605 for share-based awards granted to employees and consultants, professional fees of $275,741 including legal fees of $86,975 for SEC attorney and other legal services and tax and accounting fees of $155,350, software costs of $151,457, and insurance costs of $349,972.

We expect general and administrative expenses to decrease slightly from the first quarter of 2024 over the next several quarters as we incurred our 2023 audit fees in the quarter and will not have them in the subsequent quarters. Costs such as insurance and public company reporting and compliance requirements will offset some of this cost reduction.

Interest and Other Expenses

Interest and other income/expenses for the three months ended March 31, 2024 was $21,803,709. Non-cash interest expense of $314,838 was recognized for the amortization of debt issuance costs and accretion of principal on the May 2023 Notes through the date these notes were exchanged for Preferred Stock. We recorded a loss on the conversion of some of these notes of $333,544 and a loss from the exchange of these notes for Preferred Stock of $1,314,064. We recorded a loss on the change in the estimated fair value of the Series A and Series B Warrant liabilities of $20,004,342 which was partially offset by a gain of $165,355 from the exercise of some of the Series B Warrants.

Interest and other income/expenses for the three months ended March 31, 2023 were $1,774,134. Non-cash interest expense of $1,776,636 was recognized for the amortization of debt issuance costs and accretion of principal on the Convertible Notes issued in August 2022.

Non-cash interest expense will no longer be recognized on the May 2023 Notes in the future due to the exchange of the May 2023 Notes for Series A Convertible Preferred Stock. Gains or losses from the change in the estimated fair value of the Series A and Series B Warrants will occur primarily based on changes in our common stock price and if the number of warrants adjusts if we complete additional equity issuances or additional reverse stock splits as specified in the terms of these warrant agreements.

Net Loss

Net loss for the three months ended March 31, 2024 was $26,048,044. Net loss for the three months ended March 31, 2023, was $7,299,469.

Liquidity and Capital Resources

On March 31, 2024, we had cash and restricted cash of $3.6 million, including $0.1 million of restricted cash, and we had working capital of $2.2 million. Since inception we have funded our operations from proceeds from debt and equity sales.

Cash used in operating activities

Net cash used in operating activities was $4.5 million for the three months ended March 31, 2024 and includes all of our operating costs except depreciation and amortization of $0.1 million, non-cash interest expense for the amortization of debt issuance costs and accretion of principal on the May 2023 Notes of $0.3 million, loss on change in derivative financial liabilities of $20.0 million, losses on conversion and exchange of Convertible Notes of $1.6 million and $0.2 million from the loss on disposal of fixed assets. Cash used in operating activities includes an increase in accounts receivable of $0.1 million due to sales to our U.S. dealers, an increase of $0.5 million in prepaid inventory deposits primarily for purchases of Stag raw materials, a decrease of $0.5 million in accounts payable, and an increase of $0.3 million in accrued liabilities. As of March 31, 2024, we have a decrease of $0.3 million in customer deposits, primarily due to orders being fulfilled for two of our Latin American distributors for shipments of Brats and Grunt EVOs paid for previously.

Net cash used in operating activities was $6.5 million for the three months ended March 31, 2023 and includes all of our operating costs except stock-based compensation, write-down of inventory, depreciation and amortization, non-cash interest expense for the amortization of debt issuance costs and accretion of principal on Convertible Notes, and gain on sale assets and leases. Cash used in operating activities includes a decrease in accounts receivable of $0.2 million for collections net of sales, increases in inventory of $0.5 million and inventory deposits of $0.8 million as we made purchases and deposits for Brats and Volcon Youth motorcycles, a decrease of $0.5 million for both accounts payable and accrued liabilities due to timely payment of outstanding amounts due and a reversal of an accrual for anticipated shipping and tariffs related to shipping raw material and subassembly inventory to our third party manufacturer in Mexico as final assembly was moved to Arizona.

Cash used in investing activities

Net cash used in investing activities was $0.1 million for the three months ended March 31, 2024, primarily consisting of $0.1 million of purchases of equipment and tooling. Net cash used in investing activities was $0.2 million for the three months ended March 31, 2023, consisting of $0.3 million of purchases of equipment and tooling offset by proceeds received of $0.1 million for the sale of two vehicles.

Cash provided by financing activities

Cash provided by financing activities for the three months ended March 31, 2024, was $0.1 million and was primarily related to proceeds from the exercise of Series B Warrants.

Cash used financing activities for the three months ended March 31, 2023, was less than $0.1 million and was related to proceeds used from the sale of vehicles to pay off notes payable and proceeds received from the exercise of stock options.

Our continuation as a going concern is dependent upon our ability to attain profitable operations and if necessary, obtain continued financial support from the issuance of debt or equity. As of March 31, 2024, we had incurred an accumulated deficit of $146.9 million since inception.

Management anticipates that our cash on hand as of March 31, 2024 plus the cash expected to be generated from operations will not be sufficient to fund planned operations during the near term and not beyond one year from the date of the issuance of the financial statements as of and for the three months ended March 31, 2024. To continue our operations in the near term we will be required to raise additional financing prior to the third quarter of 2024. We do not have commitments for any such financing, and there can be no assurance that such additional funding would be available to the Company on acceptable terms, or at all. If we are unable to raise additional near-term financing, we will be required to modify or cease our operations. These factors raise substantial doubt regarding our ability to continue as a going concern.

JOBS Act Accounting Election

The recently enacted JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

We have implemented all new accounting pronouncements that are in effect and may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies:

Derivative Warrant Liabilities

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including conversion features of our convertible debt and warrants issued in connection with our convertible debt, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 ASC Topic 815, “*Derivatives and Hedging” (“*ASC 815”). The classification of derivative financial instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.

We account for the Series A Warrants and Series B Warrants issued in connection with the November 2023 Common Units and Pre-funded Warrant Units as financial liabilities in accordance with ASC 815. Accordingly, we recognize these financial liabilities at fair value initially and adjust them to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised or until warrant exercise price and number of warrants become fixed, and any change in fair value is recognized in the statement of operations. The fair value of these financial instruments were initially measured at fair value using a Monte Carlo simulation model and subsequently, the fair value was also estimated using a Monte Carlo simulation model as of March 31, 2024. In addition, we made a probability assessment as to whether our stockholders would approve the adjustment of the exercise prices of the financial liabilities. The determination of the fair value of the warrant liability may be subject to change as more current information becomes available and accordingly the actual results could differ significantly. The Series A Warrants and Series B Warrants are classified as current liabilities as the timing of their exercise is at the discretion of the warrant holders and the warrants were fully vested as of the date they were issued.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to our Chief Executive Officer, who serves as our principal executive officer, and Chief Financial Officer, who serves as our principal financial officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were not effective as of March 31, 2024 to provide assurance 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 rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures as we have previously missed filing certain forms timely and we have not implemented and tested controls and procedures to conclude that we have remediated this deficiency. Notwithstanding this conclusion, we believe that our unaudited consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects. Management is working to identify corrective actions for the weakness and will periodically re-evaluate the need to add personnel and implement improved review procedures.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Except as set forth below, there have been no material changes to the risk factors included in the Form 10-K filed with the SEC on March 28, 2024, which is accessible on the SEC’s website at www.sec.gov (http://www.sec.gov).

Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations in the near-term.

We anticipates that our cash on hand as of March 31, 2024 plus the cash expected to be generated from operations will not be sufficient to fund planned operations into the third quarter of 2024, and we will be required to raise additional funds prior to such date. We can provide no assurance that such funding would be available to us on acceptable terms, or at all. If we fail to raise additional proceeds, we will be required to modify or cease our operations. These factors raise substantial doubt regarding our ability to continue as a going concern.

If we fail to satisfy all applicable continued listing requirements of the Nasdaq Capital Market prior to June 24, 2024 our common stock will be delisted from Nasdaq, which could have an adverse impact on the liquidity and market price of our common stock.

On December 19, 2023, we were notified by the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) that we were not in compliance with Nasdaq’s Listing Rule 5550(a)(2), as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days. On January 4, 2024, the Staff notified us that the market value of its listed securities had been below the minimum $35,000,000 required for continued listing as set forth in Nasdaq’s Listing Rule 5550(b)(2) for the previous 180 calendar days and served as an additional basis for delisting.

We submitted a hearing request to Nasdaq’s Hearings Department, which stayed the suspension of our common stock. The hearing was held on March 26, 2024. On April 2, 2024, we received notification from the Nasdaq Hearings Panel (“Panel”) that it has granted an extension until June 24, 2024, to demonstrate compliance with Listing Rules 5550(a)(2) and 5550(b)(1) (which requires at least $2.5 million in shareholders’ equity), subject to certain conditions.

In the event that our common stock is delisted from Nasdaq and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such an event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.

We have issued Series B warrants in connection with the public offering completed in November 2023 that have provisions that can increase the number of warrants and reduce the exercise price if we complete certain transactions.

Our public offering completed in November 2023 included Series A and Series B warrants (“Series A Warrants” and “Series B Warrants”) to purchase our common stock with initial exercise prices of $24.75 and $37.80, respectively. As of March 31, 2024, approximately 42,000 and 14.5 million Series A Warrants and Series B Warrants, respectively, remain outstanding and the Series A Warrants have an exercise price of $1.8636 and the Series B Warrants have an exercise price of $0.9059. Series A Warrants may be exercised on an alternative cash basis where each warrant exercised will result in the Company issuing three shares of common stock.

The Series B Warrants provide, subject to certain exemptions, that if we sell or issue, any common stock or convertible securities, at an effective price per share less than the exercise price of the Series B Warrant then in effect, or a Dilutive Issuance, the exercise price of the Series B Warrant will be reduced to an amount equal to the lowest daily volume weighted average price (“VWAP”) during the period commencing five consecutive trading days following the Dilutive Issuance and the number of shares issuable upon exercise of the Series B Warrant shall be proportionally adjusted so that the aggregate exercise price of the Series B Warrant shall remain unchanged.

Further, if at any time on or after the date of issuance there occurs any share split, share dividend, share combination, recapitalization or other similar transaction involving our common stock and the lowest daily VWAP during the five consecutive trading days prior to the date of such event and the five consecutive trading days after the date of such event is less than the exercise price then in effect, then the exercise price shall be reduced to the lowest daily VWAP during such period and the number of warrant shares issuable shall be increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, shall be equal to the aggregate exercise price on the date of issuance.

As a result of the 1 for 45 reverse stock split we completed on February 5, 2024, the exercise price of approximately 15.8 million Series B Warrants were reset to $1.8646 based on the lowest VWAP over the course of the five day trading period through February 12, 2024 and the new amount of Series B Warrants as of this date became approximately 7.1 million.

As a result of the exchange of the Convertible Notes for Preferred Stock (convertible at $1.33 per share of common stock) in March 2024, the exercise price of the Series B warrants adjusted to $0.91 per share based on the lowest VWAP in the five day trading period through March 12, 2024 and the total number of Series B Warrants adjusted to approximately 14.5 million.

In order to attempt to satisfy the Nasdaq minimum bid price requirement of $1.00 per share described in the previous risk factor, we have asked our shareholders at our annual meeting to be held May 28, 2024 to grant our board the authority to effect a reverse stock split of between 1-for-10 and 1-for-100. Based on our current stock price, we will be required to complete a reverse stock split prior to June 10, 2024 in order satisfy the minimum bid price requirement. As such, it is likely that further adjustments to the Series B Warrant exercise price and number of warrants will occur if we complete another reverse stock split per the terms of the Series B Warrants. In addition, as described above, we will need to raise additional financing in the near-term, which may cause further adjustments to the Series B Warrant exercise price and number of warrants.

Finally, the Series B Warrants provide that the exercise price of such warrants may be decreased at our discretion with the approval of a majority of the warrant holders. In order to induce the exercise of the Series B Warrants, either to raise additional funds from such exercise or simply to eliminate the warrants in order to eliminate the above provisions from causing additional dilution upon the completion of a reverse stock split or new financing, we may agree to reduce the exercise price of the Series B Warrants and such reduction could be significantly lower than the current market price of our common stock.

Although some of the holders of Series A and Series B Warrants have ownership limitations, if and when we do issue additional shares of common stock to holders of the Series A Warrants and Series B Warrants upon the exercise by the holder, such stockholders may resell all, some or none of those shares of common stock at any time or from time to time at their discretion. Resales of our common stock may cause the market price of our securities to drop significantly, regardless of the performance of our business.

In March 2024, we exchanged our outstanding convertible notes for Preferred Stock and a significant number of shares of common stock could be issued upon conversion.

In March 2024, we issued Series A Preferred Stock (the “Preferred Stock”) at $1,000 per share in exchange for $24.7 million principal of convertible notes. The initial conversion price for the Preferred Stock is $1.33 and is convertible at any time. Through May 6, 2024, certain holders of the Preferred Stock converted approximately $10.7 million for approximately 8.1 million shares of common stock. The total number of shares of common stock that could be issued as of May 6, 2024 for the outstanding Preferred Stock on this date is approximately 10.5 million shares.

The conversion price of the Preferred Stock is subject to adjustment if certain events such as a stock split, reverse stock split, or stock dividend occurs, or if we issue equity or convertible instruments at offering prices below the conversion price. In addition, in the event of a change of control or sale of substantially all of the Company’s assets, the Preferred Stock agreement provides for distributions that are either based on the number of common stock shares issuable under these agreements or based on other valuations as defined in the agreement. In order to attempt to satisfy the Nasdaq minimum bid price requirement of $1.00 per share described above, we have asked our shareholders at our annual meeting to be held May 28, 2024 to grant our board the authority to effect a reverse stock split of between 1-for-10 and 1-for-100. Based on our current stock price, we will be required to complete a reverse stock split prior to June 10, 2024 in order satisfy the minimum bid price requirement. As such, it is likely that further adjustments to the Preferred Stock conversion price will occur if we complete another reverse stock split per. In addition, as described above, we will need to raise additional financing in the near-term, which may cause further adjustments to the Preferred Stock conversion price. The reduction of the Preferred Stock conversion price will proportionately increase the number of shares of common stock issuable upon the future conversion of the Preferred Stock.

The Preferred Stock holders may resell all, or some of the shares of common stock underlying the Preferred Stock after conversion, at any time or from time to time at their discretion. Resales of our common stock may cause the market price of our securities to drop significantly, regardless of the performance of our business. The adjustment of the conversion price for the Preferred Stock held by these investors based on the price of future issuances of securities could also limit our ability to raise capital as potential investors may not make an investment in a new issuance of securities if their investment could be immediately diluted due to adjustments in the conversion price or warrant exercise prices.