Beam Global: Form 10-Q for the period ended Jun 30, 2024

This report contains forward-looking statements that are based on current expectations, estimates, forecasts, and projections about us, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” and variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause the Company’s actual results to be materially different from any future results expressed or implied by the Company in those statements. The most important factors that could prevent the Company from achieving its stated goals include, but are not limited to, the following:

(a) volatility or decline of the Company’s stock price, or absence of stock price appreciation;

(b) fluctuation in quarterly results;

(c) failure of the Company to earn revenues or profits;

(d) inadequate capital to continue or expand its business, and the inability to raise additional capital or financing to implement its business plans;

(e) reductions in demand for the Company’s products and services, whether because of competition, general industry conditions, loss of tax incentives for solar power, technological obsolescence or other reasons;

(f) litigation with or legal claims and allegations by outside parties;

(g) insufficient revenues to cover operating costs, resulting in persistent losses;

(h) rapid and significant changes to costs of raw materials from government tariffs or other market factors;

(i) failure to realize the anticipated benefits of any acquisition or difficulties in integrating any acquisition with the Company and its operations;

(j) the preceding and other factors discussed in Part I, Item 1A, “Risk Factors,” and other reports we may file with the Securities and Exchange Commission from time to time; and

(k) the factors set forth in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor 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. Because factors referred to elsewhere in this report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2023 (sometimes referred to as the “2023 Form 10-K”) that we previously filed with the Securities and Exchange Commission, including without limitation the “Risk Factors” section in the 2023 Form 10-K, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as may be required by applicable law, we undertake no obligation to release publicly the results of any revisions to these forward-looking statements or to reflect events or circumstances arising after the date of this report on Form 10-Q.

Overview

Beam Global develops, manufactures, and sells high-quality, renewably energized infrastructure products for electric vehicle charging infrastructure, energy storage, energy security, and disaster preparedness.

The Company has five product lines that incorporate our proprietary technology for producing a unique alternative to grid-tied charging, having a built-in renewable energy source in the form of attached solar panels and/or light wind generator to produce power and battery storage to store the power. These products are rapidly deployable and attractively designed and include:

• EV ARC™ Electric Vehicle Autonomous Renewable Charger – a patented, rapidly deployed, infrastructure product that uses integrated solar power and battery storage to provide a mounting asset and a source of power for factory installed electric vehicle charging stations of any brand. The electronics are elevated to the underside of the sun-tracking solar array making the unit flood-proof up to nine and a half feet and allowing adequate space to park a vehicle on the engineered ballast and traction pad which gives the product stability and a certified wind rating of 160 miles per hour.
• Solar Tree® DCFC – Patented off-grid, renewably energized and rapidly deployed, single-column mounted smart generation and energy storage system with the capability to provide a 150kW DC fast charge to one or more electric vehicles or larger vehicles.
• EV ARC™ DCFC – DC Fast Charging system for charging EVs comprised of four interconnected EV ARC™ systems and a 50kW DC fast charger.
• BeamSpot™ – patent issued on December 31, 2019 and currently under development. A lamp standard, EV charging and emergency power product which uses an existing streetlight’s foundation and a combination of solar, wind, grid connection and onboard energy storage to provide curbside charging and emergency power.
• UAV ARC™ - patent issued on November 24, 2020 and currently under development. An off-grid, renewably energized and rapidly deployed product and network used to charge aerial drone (UAV) fleets.

We believe that there is a clear need for a rapidly deployable and highly scalable EV charging infrastructure, and that our products fulfill that requirement. Unlike grid-tied installations which require general and electrical contractors, engineers, consultants, digging trenches, permitting, pouring concrete, wiring, and ongoing utility bills, the EV ARC™ system can be deployed in minutes, not months, and is powered by renewable energy so there is no utility bill. We are agnostic as to the EV charging service equipment or provider and integrate best of breed solutions based upon our customer’s requirements. For example, our EV ARC™ and Solar Tree® products have been deployed with Chargepoint, Blink, Enel X, Electrify America and other high quality EV charging solutions. We can make recommendations to customers, or we can comply with their specifications and/or existing charger networks. Our products replace the infrastructure required to support EV chargers, not the chargers themselves. We do not sell EV charging, rather we sell products which enable it.

We believe our chief differentiators for our electric vehicle charging and energy security infrastructure products are:

• our patented, renewable energy products dramatically reduce the cost, time and complexity of the installation and operation of EV charging infrastructure and outdoor media platforms when compared to traditional, utility grid tied alternatives;
• our proprietary and patented energy storage solutions;
• our first-to-market advantage with EV charging infrastructure products which are renewably energized, rapidly deployed and require no construction or electrical work on site;
• our products’ capability to operate during grid outages and to provide a source of EV charging and emergency power rather than becoming inoperable during times of emergency or other grid interruptions; and
• our ability to continuously create new and patentable marketable inventions by integrating our proprietary technology and parts, and other commonly available engineered components, which create a further barrier to entry for our competition;
• our international operations in two of the three largest automotive markets in the world today.

With the acquisition of All Cell Technologies, LLC (“All Cell”) in March 2022, we now offer Beam AllCell™ energy storage technology with a highly flexible lithium-ion and/or lithium iron phosphate battery platform architecture. The battery design uses a proprietary phase change material which provides a low-cost and passive (does not require energy) thermal management solution and a unique safety mechanism to prevent propagation of thermal runaway. Our batteries are ideally suited for applications where energy density, safety and specialized enclosures require high power in small spaces. Drones, submersibles, medical and recreational products and a host of micro mobility products benefit from this technology. Beam is already using AllCell™ energy storage products in EV ARC™ products for EV charging and plans to incorporate this battery technology in our new product designs that are under development.

On October 20, 2023, Beam acquired Amiga DOO Kraljevo (“Amiga”), a business located in Serbia and engaged in the manufacture and distribution of steel structures with electronic integration, including (i) infrastructure products for public lighting; (ii) infrastructure products for mobile telephone, networks and transmission lines; (iii) infrastructure products for tram, trolleybus, and railways; (iv) infrastructure products for contact networks, masts, portals and semi-portals for road and railway signaling; (v) large steel lattice structures for specific purposes (e.g., stadiums, factories, power plants, etc.); and (vi) distribution and command electrical cabinets. Amiga has engineering, product development and manufacturing capabilities which are well suited to manufacture and sell Beam’s current and future products in the European market. As a large European manufacturer of streetlights, Amiga is well positioned to assist in the development of the EV-Standard™ for both the European and US markets.

Overall Business Outlook

Our revenues for the first six months of 2024 were $29.4 million, a 5% decrease from $30.8 million for the first six months in 2023. We believe that the decrease in revenue is as a result of order timing, particularly from some of our larger federal customers rather than any fundamental reduction in demand for our products. Our pipeline of prospective customer orders has increased during the same period, although we cannot be sure of when, or if, those prospective orders will turn into actual sales. We have continued investment in our sales and marketing resources over the past three years which we believe has created increased demand for our EV ARC™ renewable charging infrastructure products during that time. The Company believes there continues to be a high level of support for funding EV charging infrastructure from both government and commercial entities, including a number of federal grants available under the Inflation Reduction Act. In addition, certain of our commercial customers may benefit from the Federal Solar Investment Tax Credit and accelerated depreciation as allowed under Section 179 of IRS code which, we believe, provide a competitive advantage for our products over traditionally installed EV charging infrastructure which is not eligible for these incentives. Given these available incentives, we have invested in a federal lobbyist, a federal business development resource and a government relations employee, who have helped to identify opportunities and increased awareness of our product and outreach with federal agencies. In addition, the General Services Administration (GSA) awarded Beam Global a federal blanket purchase agreement in April 2022 which provides federal agencies a streamlined procurement process for procuring EV ARC™ systems. In the six months ended June 30, 2024, we recorded revenues of $22.4 million for federal customers, compared to $26.5 million for the same period in 2023. We expect to see uneven orders from quarter to quarter, especially with our federal customers, but over time we expect our revenues to grow. Our commercial, non-government, revenues increased as a percentage of our revenues from 14% to 24% in the first six months of 2023 to the first six months of 2024.

We expect the electric vehicle market to continue to experience significant growth over the next decade which will in turn increase demand for additional EV charging infrastructure. We believe our products are positioned to benefit significantly from this growth.

We believe the Company’s acquisition of All Cell, a battery technology company, will increase our new customer opportunities. We now have the ability to value engineer bespoke battery solutions for our products. Beam All-Cell™ batteries are ideally suited for applications where energy density, safety and bespoke enclosures require high power in small spaces. Drones, submersibles, recreational products and a host of micro mobility and electric vehicle products are already benefiting from our Beam All-Cell™ highly differentiated products. With the continued growth of untethered electrification, we believe there is an opportunity for increased demand in these markets and others.

In October 2023, the Company acquired Amiga, an established manufacturer of specialized steel structures and equipment, producing streetlights, communications and energy infrastructure whose manufacturing, engineering and sales teams service municipalities, states and commercial customers in 16 nations. The addition of Amiga has expanded Beam’s presence into the European market and increase its production, engineering, sales and product development expertise. The EU has mandated a transition to zero emission vehicles by 2035 and they are heavily focused on green and sustainable energy. An increase in electric vehicles adoptions will increase the demand for charging infrastructure. We believe that our sustainably energized EV ARCTM and BeamSpot™ products can play a major role in the provision of EV charging infrastructure in Europe.

Our energy security business is connected with the deployment of our EV charging infrastructure products and serves as an additional benefit and value proposition for our charging products which, along with their integrated emergency power panels, can continue to operate, charge EVs, and deliver emergency power during utility grid failures. The state-of-the-art storage batteries installed on our EV charging systems are immune to grid failures and provide another benefit for customers such as municipalities, counties, states, the federal government, hospitals, fire departments, large private enterprises with substantial facilities, and vehicle fleet operators.

We are in development on our newest patented products - our BeamSpot™ and UAV ARC™, which we expect will expand our product offerings leveraging the same proprietary technology as our current products and allow us to expand into new markets. Amiga is one of Europe’s largest manufacturers of streetlights and has a team of qualified structural, electrical and civil engineers who are experts in the field of development and deployment of street lighting. They are working with our engineers in San Diego and Chicago to finalize the engineering and product development on our new BeamSpot™ product. We believe that BeamSpot™ may become our largest selling product when available for sale.

Our gross profit improved as a percentage of sales and was 15.9% in Q2 2024, up 13.1% from the gross profit reported in Q2 2023. Additionally, our cost of goods sold included non-cash intellectual property amortization of $0.2 million for the first three months of both 2024 and 2023, related to the acquisition of All Cell in 2022. Excluding this non-cash expense results in a gross profit of 17.1% for the three months ended June 30, 2024, up from 3.8% for the same period ending June 30, 2023. We implemented engineering design changes to our EV ARCTM in Q4 2023 that resulted in cost reductions to our bill of materials. Our gross profit improvements were achieved in spite of ongoing inflation and the high costs of many of our components, including steel, that began during the Covid pandemic. We expect to see these costs continue to decrease over time. We are implementing lean manufacturing process improvements and making engineering changes to our products which we expect to result in cost reductions. We have observed that we are able to manufacture certain elements of our products in Serbia and ship them to the U.S. less expensively than we can manufacture them in the U.S.; largely because we are better equipped in Serbia and as a result can self-perform certain processes which we outsource in the U.S. We anticipate further reductions in direct costs as a result of having our Serbian operations support our U.S. manufacturing. Many of the components that we integrate into our products are manufactured by others. This is consistent with our strategy to take advantage of the investment by large and well-funded organizations in the improvement, and reducing cost, of various components and sub-assemblies which we integrate into our final product. We continue to identify components and sub-assemblies that may be more cost effective to outsource, which we believe may further reduce our costs, increase our gross margins, and significantly increase the potential output from our factory. We expect that the receipt of orders may be inconsistent quarter over quarter, however, we expect that in the long-term, our revenues will continue to grow as we expect to see a significant increase in the demand for electric vehicle charging infrastructure and as such we do not anticipate significant pricing pressure on our products. The combination of this increase in demand for electric vehicle charging infrastructure and our revenues, and the cost cutting measures described above lead us to believe that we will continue to see improvement in our gross margins in the future. Beam Europe has capabilities to perform several activities which we outsource in the US. We believe that in combination with a generally less expensive operating environment in Serbia, we will be able to produce our products in Europe less expensively than in the US, even as we continue to reduce our costs in the US.

Critical Accounting Estimates

The financial statements and related disclosures were prepared in accordance with U.S. generally accepted accounting principles which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, and we continually evaluate our assumptions and modify as needed. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the allowance for certain expected credit losses (CECL), valuation of inventory and standard cost allocations, depreciable lives of property and equipment, valuation of intangible assets, valuation of contingent consideration liability, estimates of loss contingencies, estimates of the valuation of lease liabilities and the related right of use assets, valuation of share-based costs, and the valuation allowance on deferred tax assets.

Results of Operations

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

Revenues. For the quarter ended June 30, 2024, our revenues decreased 17% to $14.8 million compared to $17.8 million for the same period in 2023. Revenues to federal customers decreased by $5.1 million in Q2 2024 compared to the quarter ended June 30, 2023. We also recorded revenues of $2.8 million as a result of our acquisition of Amiga. We continue to invest in sales and marketing employees, resources and programs to raise awareness of the benefits and value of our products. The receipt of orders may continue to be uneven due to the timing of customer approvals or budget cycles, however, we believe that as EV adoption increases in concert with increased availability of infrastructure funding, our business will be less impacted by specific variations in order timing.

Gross Profit. For the quarter ended June 30, 2024, our gross profit was $2.4 million, or 15.9% of sales, compared to a gross profit of 2.8% of sales for the same period in 2023. The margin improved by 13.1 percentage points, primarily because we have implemented cost improvements in late 2023 as a result of design changes to the EV ARCTM as well as operational improvements and positive margins generated from the acquisition of Amiga. Our gross profits included a negative impact of $0.3 million for non-cash depreciation and intangible amortization. Our gross profits net of non-cash items was 18.0%. We began to see some improvements in the reduction of material costs in late 2023, which we believe should continue to improve. Our engineering and operations teams continue to identify further cost reductions and efficiencies which, along with support from our Serbian facilities, we believe will improve our gross margins in future quarters.

Operating Expenses. Total operating expenses were $7.1 million, or 48% of revenues, for the quarter ended June 30, 2024, compared to $4.0 million, or 23% of revenues, for the same quarter in the prior year. The $3.1 million increase is mostly attributable to $1.4 million related to the change in fair value of contingent consideration, which is non-cash, for the Amiga acquisition, $0.6 million for operating expenses for Beam Europe, $0.5 million in Audit and Accounting services, $0.4 million in commission expenses, $0.1 million in legal costs and $0.1 million allowance for credit losses. Total operating expenses excluding non-cash items were $4.3 million, 29% of revenues, which included $1.7 million fair value of contingent consideration, $0.8 million for non-cash compensation, $0.3 million allowance for credit losses and $0.1 million depreciation and amortization.

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

Revenues. For the six months ended June 30, 2024, our revenues decreased 5% to $29.4 million compared to $30.8 million for the same period in 2023. Revenues to federal customers decreased by $5.1 million in 2024. During the first six months of 2024, revenues from California represented 27% of total revenues. Revenues were diverse across federal, state and local governments, as well as enterprise and education sector customers. International customers comprised 15% of the revenues through June 30, 2024, and were primarily from Beam Europe. Revenues derived from non-government, commercial entities increased by 83% from Q2 2023 to Q2 2024. We continue to invest in sales and marketing employees, resources and programs to raise awareness of the benefits and value of our products. The receipt of orders may continue to be uneven due to the timing of customer approvals or budget cycles, however we believe that as EV adoption increases in concert with increased availability of infrastructure funding, our business will be less impacted by specific variations in order timing.

Gross Profit. For the six months ended June 30, 2024, our gross profit was $3.8 million, or 13% of sales, compared to a gross loss of $0.5 million, or 2% of sales in the same period of 2023. The margin improved by 11.4 percentage points, compared to prior year. This is primarily a result of cost improvements developed during 2023 which are now being recognized and the positive margins we are generating from the acquisition of Amiga. Our gross profits were negatively impacted by $0.6 million for non-cash depreciation and intangible amortization. Our gross profits net of non-cash items was 14.9%. We began to see some improvements on material pricing in 2023, which has continued to improve over time. We continue to make engineering changes and work with suppliers to improve our costs which, along with support from our Serbian facilities, we believe will continue to improve our gross profit over time.

Operating Expenses. Total operating expenses were $11.7 million, or 40% of revenues, for the six months ended June 30, 2024, compared to $7.9 million, or 26% of revenues, for the same period in the prior year. The $3.8 million increase is mostly attributable to $1.3 million related to the change in fair value of contingent consideration, which is non-cash, for the Amiga acquisition, $0.9 million for operating expenses for Beam Europe, $0.7 million in Audit and Accounting services, $0.4 million in commission expenses, $0.3 million in consultant costs for Design Engineering, and $0.1 million allowance for credit losses. Total operating expenses excluding non-cash items were $8.1 million, 28% of revenues, which included $1.5 million fair value of contingent consideration, $1.3 million for non-cash compensation, $0.4 million allowance for credit losses and $0.3 million depreciation and amortization.

Liquidity and Capital Resources

At June 30, 2024, we had cash of $8.7 million, compared to cash of $10.4 million at December 31, 2023. We have historically met our cash needs through a combination of debt and equity financing. Our cash requirements are generally for operating activities.

Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the table below:

For the six months ended June 30, 2024, our cash used in operating activities was $0.1 million compared to cash used of $5.1 million for the six months ended June 30, 2023. Net loss of $8.0 million for the six months ended June 30, 2024 was increased by $4.2 million of non-cash expense items that included depreciation and amortization of $1.9 million, employee stock-based compensation expense of $1.3 million, offset by decreases of $0.6 million provision on credit losses and $1.5 million for a change in fair value of contingent consideration liabilities. Cash used in operations included a $3.3 million decrease in accounts receivable as well as a $1.7 million decrease in accounts payable primarily for inventory, $0.3 million decrease in prepaid expenses and other current assets offset by $1.7 million increase in accrued expenses, $1.0 million increase in inventory, and $0.3 million increase in deferred revenue.

For the six months ended June 30, 2023, our cash used in operating activities was $5.1 million compared to $7.4 million for the six months ended June 30, 2022. Net loss of $7.4 million for the six months ended June 30, 2023 was increased by $2.1 million of non-cash expense items that included depreciation and amortization of $0.7 million, common stock issued for services for director compensation of $0.2 million, employee stock-based compensation expense of $0.9 million, change in the fair value of contingent consideration liabilities of $0.3 million and $0.1 million of other for stock compensation for non-employees. Cash used in operations included a $6.0 million increase in accounts receivable due to the increase in revenues in the quarter and $0.4 million decrease in deferred revenue. Cash generated from operations included a $4.3 million increase in accounts payable primarily for inventory, $1.9 million increase in accrued expenses, and $0.3 million decrease in prepaid expenses and other current assets.

Cash used in investing activities in the six months ended June 30, 2024 included $2.7 million reduction of deferred consideration for a cash payment for the Amiga acquisition and $0.2 million for the purchase of equipment compared to $0.5 million purchased in the same period in the prior year.

For the six months ended June 30, 2024, cash generated by our financing activities included $0.8 million for the exercise of warrants and $0.5 million in proceeds from public offering issuance of common stock compared to $2.1 million in proceeds from the public offering issuance of common stock, net of offering expenses, and $0.1 million from the exercise of warrants for the same period in the prior year.

Current assets were $36.3 million on June 30, 2024, a decrease of $4.4 million at December 31, 2023, primarily due to decreases of $3.3 million in accounts receivable, $1.6 million in cash, $0.3 million in prepaid expenses and other current assets, offset by an increase of $1.0 million in inventory. Current liabilities increased to $20.2 million at June 30, 2024 from $16.9 million at December 31, 2023, primarily due to a $1.7 million increase accrued expenses and $5.4 million increase in the fair value of contingent consideration liabilities. As a result, our working capital decreased to $16.0 million at June 30, 2024 compared to $23.8 million at December 31, 2023.

The Company has been focused on marketing and sales efforts to increase our revenues. Revenues increased annually by 45% from 2020 to 2021, 144% from 2021 to 2022, and 206% from 2022 to 2023 demonstrating that this investment has been successful. Improvements to gross profitability have been made despite the current inflationary period. As revenues increase, we expect to continue to see our fixed overhead costs spread over more units, which will reduce the cost per unit. Our engineering and operations teams have made several design changes and process improvements in our product development and manufacturing operations which has helped to increase labor efficiency and reduce material costs. In addition, the Company increased pricing in Q3 of 2023 for the first time to cover some of the inflationary cost increases, which we should benefit from as new orders are received and are shipped in future quarters. Our Serbian operations are also able to contribute to further cost reductions to produce our products both in Europe and the U.S.

On March 22, 2023, the Company entered into that certain Supply Chain Line of Credit with OCI Limited (“OCI”), whereby OCI may provide a supply chain line of credit in the amount of up to $100 million based on the amounts of approved accounts receivable of the Company (the “Credit Facility”). In order to request a drawdown on the Credit Facility, the Company is required to submit a transaction request to OCI which sets forth the terms of the applicable account receivables, including but not limited to the name of the party responsible for the applicable account receivables (the “Obligor”), the terms of repayment and the amount of such receivables. The Company has no obligation to submit a drawdown request and OCI is not obligated to accept any drawdown request from the Company. In the event OCI accepts a drawdown request of the Company and upon satisfaction of certain conditions required by OCI to issue the drawdown, OCI will disburse funds to the Company for such drawdown in an amount equal to the full value of the applicable account receivables assigned to OCI minus any transaction expenses incurred by OCI and the full amount of interest to be incurred for such receivables over the term of the drawdown. The Company will pay interest on any drawdown at the Secured Overnight Financing Rate +300 basis points. Upon the disbursement of funds to the Company for a drawdown, the Company will assign all rights to such account receivables of the Obligor to OCI. The Company will act as collection agent on any account receivables assigned to OCI and agrees to establish a designated bank account for the purpose of collecting payment on any applicable account receivables that are assigned to OCI. In the event (i) the Company is in material breach of the Credit Facility, (ii) the Company or the Obligor is insolvent or is subject to reorganization or liquidation, or (iii) any dispute related to an agreement with an Obligor or non-payment by an Obligor, OCI has the right to exercise any contractual rights it may have against Obligor, increase the interest rate to the agreed upon default interest rate, and demand immediate repayment by the Company for the outstanding amounts owed under such account receivables. The Company has also agreed to indemnify OCI for any losses incurred by OCI in connection with the Credit Facility. Either party may terminate the Credit Facility at any time by providing fifteen (15) days prior written notice to the other party. To date, Beam Global has not drawn on this line of credit.

The Company may be required to raise capital until it achieves positive cash flow from its business, which is predicated on increasing sales volumes and the continuation of production cost reduction measures. In September 2022, the Company entered into a Common Stock Purchase Agreement with B. Riley under which the Company has the right to sell up to the lesser of either two million shares or $30 million of our common stock over a period of 24 months (see note 10 for further information.) In addition, we could pursue other equity or debt financing. The proceeds from these offerings are expected to provide working capital to fund business operations and the development of new products. Management cannot currently predict when or if it will achieve positive cash flow. There is no guarantee that profitable operations will be achieved, or that additional capital or debt financing will be available on a timely basis, on favorable terms, or at all, and such funding, if raised, may not be sufficient to meet our obligations or enable us to continue to implement our long-term business strategy. In addition, obtaining additional funding or entering into other strategic transactions could result in significant dilution to our stockholders.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors.

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. All internal control systems, no matter how well designed, have inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

During the period covered by this filing, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our internal controls over financial reporting. Based upon our evaluation, of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024 due to the material weaknesses in our internal controls over financial reporting described below. In light of this fact, our management has performed additional analyses, reconciliations and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

The following material weaknesses existed as of December 31, 2023:

Material weaknesses:

• During Q4 2023, the Company implemented NetSuite ERP system to automate operations and accounting for the San Diego and Chicago locations. We did not implement program change management and user access controls to ensure that:

a. IT program and data changes affecting the Company’s financial IT applications & underlying accounting records are identified, tested, authorized, and implemented appropriately, and

b. Appropriate segregation of duties that would adequately restrict user access and ensure adequate review of transactions.

• Because we are a small company, many employees have multiple job responsibilities, and during the implementation in Q4, access was allowed for employees to access necessary tasks. As we move forward into 2024, we will assign access to ensure the proper segregation of duties. Additionally, we need to ensure the employees are adequately trained and able to resolve issues timely. The Company needs to establish appropriate procedures for change management to ensure changes to the system are formally approved, properly restricted to appropriate personnel, and adequately tested.
• In our review, we noted that the Company did not implement adequate controls relating to documentation of the review and approval of reconciliations and other schedules prepared internally to be included or disclosed in the financial statements. Many of our reports and reconciliations are performed in Excel spreadsheets, and we did not adequately validate the segregation of duties between the preparer and the approver with a signature and time stamp. NetSuite has many robust internal control features that can be configured and utilized to ensure workflow approvals are adhered to and integrated into documentation.

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Since these controls have a pervasive effect across the inventory transaction cycle, management has determined that these circumstances constitute a material weakness, based on the criteria established in the “Internal Integrated Framework” issued by COSO in 2013 and as a result, we did not maintain effective internal control over financial reporting as of June 30, 2024.

Changes in Internal Control Over Financial Reporting

The Company is continuing to actively work to remediate the material weaknesses described above, including the need for additional remediation steps and implementing additional measures to remediate the underlying causes that give rise to the material weaknesses. During the three months ended June 30, 2024, the Company has taken various actions to strengthen our internal control over financial reporting, including:

• Continue to review access in NetSuite ERP to ensure the proper segregation of duties and additional training courses to ensure the employees are trained and able to resolve issues timely.
• Managed processes related to ordering, counting, warehousing, valuing and transacting our inventory in NetSuite ERP.
• Increasing and monitoring the adequacy of staffing levels and expertise with the requisite technical knowledge and skills to support continued enhancement on the controls and procedures surrounding documentation of review and formalization of reconciliations, accounting policies and controls.
• Continue to manage a segregation of duties between the preparer and the approver of reconciliation and supporting schedules which included hiring additional staff.

The material weaknesses will be considered remediated when management concludes that, through testing, the applicable remedial controls are designed, implemented and operating effectively. As management continues to evaluate and improve disclosure controls and procedures and internal control over financial reporting, the Company may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures identified.

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition, liquidity or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition, liquidity or future results.