Pineapple Energy Inc

Previous wording

our common stock may be delisted from Nasdaq if we cannot maintain compliance with the applicable listing standards;

Current wording

our common stock may be delisted from the Nasdaq Capital Market if we cannot maintain compliance with the applicable listing standards;

Previous wording

On June 30, 2023, the Company sold substantially all of the remaining assets of its JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”) businesses. Because the Company was working to divest such assets pursuant to the Merger Agreement, it previously met the criteria to report the operations of these businesses as discontinued operations. As a result, unless otherwise noted, all information in this Form 10-Q related to the JDL and Ecessa businesses are discussed and presented as discontinued operations and the Company reports its remaining business operations as continuing operations.

Current wording

On June 30, 2023, the Company divested its legacy operations and operating assets through the sale of substantially all of the assets of its JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”) businesses. As a result, unless otherwise noted, all information in this quarterly report on Form 10-Q related to the JDL and Ecessa businesses are discussed and presented as discontinued operations and the Company reports its remaining business operations as continuing operations.

Previous wording

On May 28, 2024, the Company’s board of directors determined to effect the reverse stock split of the common stock at a 1-for-15 ratio (the “Reverse Stock Split”) and approved an amendment (“Reverse Stock Split Amendment”) to the Fourth Amended and Restated Articles of Incorporation of the Company to effect the Reverse Stock Split.

Current wording

On May 28, 2024, the Company’s board of directors determined to effect the reverse stock split of the common stock at a 1-for-15 ratio (the “June Reverse Stock Split”) and approved an amendment (“June Reverse Stock Split Amendment”) to the Fourth Amended and Restated Articles of Incorporation of the Company to effect the June Reverse Stock Split.

Previous wording

Effective June 12, 2024, the Company amended its Fourth Amended and Restated Articles of Incorporation to implement the Reverse Stock Split. The Company's common stock began trading on a split-adjusted basis when the market opened on June 12, 2024 (the "Effective Date").

Current wording

Effective June 12, 2024, the Company amended its Fourth Amended and Restated Articles of Incorporation to implement the June Reverse Stock Split. The Company's common stock began trading on a split-adjusted basis when the market opened on June 12, 2024 (the "June Effective Date").

Previous wording

As a result of the Reverse Stock Split, at 12:01 a.m. Central Time on the Effective Date, every 15 shares of common stock then issued and outstanding automatically were combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the Reverse Stock Split, and any fractional shares that would have resulted from the Reverse Stock Split were settled in cash. The number of shares of common stock outstanding was reduced from 108,546,773 to 7,235,731, with 720.901 fractional shares paid out in cash totaling $1,132. The total number of shares authorized for issuance was reduced to 7,500,000 in proportion to the Reverse Stock Split ratio.

Current wording

As a result of the June Reverse Stock Split, at 12:01 a.m. Central Time on the June Effective Date, every 15 shares of common stock then issued and outstanding automatically were combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the June Reverse Stock Split, and any fractional shares that would have resulted from the June Reverse Stock Split were settled in cash. The number of shares of common stock outstanding was reduced from 108,546,773 to 7,235,731, with 720.901 fractional shares paid out in cash totaling $1,132. The total number of shares authorized for issuance was reduced to 7,500,000 in proportion to the June Reverse Stock Split ratio.

Previous wording

Effective as of the same time as the Reverse Stock Split, the number of shares of common stock available for issuance under the Company's equity compensation plans were automatically reduced in proportion to the Reverse Stock Split. Upon effectiveness, the Reverse Stock Split also resulted in reductions in the number of shares of common stock issuable upon exercise or vesting of equity awards in proportion to the Reverse Stock Split ratio and caused a proportionate increase in exercise price or share-based performance criteria, if any, applicable to such awards.

Current wording

Effective as of the same time as the June 2024 Reverse Stock Split and October 2024 Reverse Stock Split (collectively known as the “Reverse Stock Splits”), the number of shares of common stock available for issuance under the Company's equity compensation plans were automatically reduced in proportion to the Reverse Stock Splits ratio. Upon effectiveness, the Reverse Stock Splits also resulted in reductions in the number of shares of common stock issuable upon exercise or vesting of equity awards in proportion to the Reverse Stock Splits ratios and caused a proportionate increase in exercise price or share-based performance criteria, if any, applicable to such awards.

Previous wording

Consolidated sales decreased $6,286,871, or 31.7% to $13,549,420 in the second quarter of 2024 from $19,836,291 in the second quarter of 2023. Sales in the second quarter of 2024 and 2023 by type were as follows:

Current wording

Consolidated sales decreased $3,570,311, or 19.5% to $14,718,386 in the third quarter of 2024 from $18,288,697 in the third quarter of 2023. Sales in the third quarter of 2024 and 2023 by type were as follows:

Previous wording

Residential contract sales decreased $9,434,879, or 28%, due to a 19% reduction in residential kilowatts installed and also a decrease in average price per system installed as result of lower financing fees and lower battery attachment rate. The residential market within the solar industry is seeing an overall decline in installations due to higher interest rates. Commercial contract sales decreased $5,098,647, or 77%, due to a delay in the start of commercial pipeline projects into the second half of 2024.

Current wording

Residential contract sales decreased $4,699,412, or 31%, due to a 22% reduction in residential kilowatts installed and also a decrease in average price per system installed as result of lower battery attachment rate. The residential market within the solar industry is seeing an overall decline in installations due to higher interest rates. Commercial contract sales increased $1,416,135, or 64%, due to larger commercial projects that were pushed into the third quarter of 2024 with lower projects in prior quarters of 2024 whereas the prior year had more consistent commercial projects throughout the year.

Previous wording

Consolidated gross profit decreased to $4,792,354 in the second quarter of 2024 as compared to gross profit of $7,136,934 in the second quarter of 2023 due primarily to the decrease in revenue during the quarter. Gross margin decreased slightly to 35% during the second quarter of 2024 as compared to 36% in the second quarter of 2023.

Current wording

Consolidated gross profit decreased to $5,235,725 in the third quarter of 2024 as compared to gross profit of $7,032,458 in the third quarter of 2023 due primarily to the decrease in revenue during the quarter. Gross margin decreased slightly to 36% during the third quarter of 2024 as compared to 38% in the third quarter of 2023 due primarily to certain fixed costs on lower revenue.

Previous wording

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement gain (loss) of SUNation earnout consideration, decreased to $6,818,298 in the second quarter of 2024 as compared to $8,552,254 in the second quarter of 2023. Consolidated selling, general and administrative expenses decreased $671,632, or 18%, to $6,558,923 in the second quarter of 2024 from $7,230,555 in the second quarter of 2023, due primarily to a $312,120 decrease in stock compensation expense and overall decreased personnel expenses on lower headcount. Amortization expense decreased by $507,324 to $709,375 in the second quarter of 2024 as compared to $1,216,699 in the same period of the prior year due to the completion of the amortization of certain intangible assets in late 2023. The fair value remeasurement related to the SUNation acquisition earnout consideration in the second quarter of 2024 was a gain of $450,000 compared to a loss of $105,000 in the same period of the prior year.

Current wording

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, and a fair value remeasurement gain (loss) of SUNation earnout consideration, decreased to $6,842,462 in the third quarter of 2024 as compared to $8,596,808 in the third quarter of 2023. Consolidated selling, general and administrative expenses decreased $1,017,023, or 14%, to $6,133,087 in the third quarter of 2024 from $7,150,110 in the third quarter of 2023, due primarily to a $555,765 decrease in stock compensation expense and overall decreased personnel expenses on lower headcount. Amortization expense decreased by $507,323 to $709,375 in the third quarter of 2024 as compared to $1,216,698 in the same period of the prior year due to the completion of the amortization of certain intangible assets in late 2023. There was not a fair value remeasurement related to the SUNation acquisition earnout consideration in the third quarter of 2024 compared to a loss of $230,000 in the same period of the prior year.

Previous wording

Consolidated other (expense) income decreased by $5,993,320 to expense of $4,914,704 in the second quarter of 2024 as compared to $1,078,616 in income in the second quarter of 2023. The decrease was primarily related to a $3,267,571 fair value remeasurement loss on the warrant liability, a $1,055,600 fair value remeasurement loss on the embedded derivative liability, a $1,525,420 decrease in fair value remeasurement gain on the contingent value rights (“CVRs”), and a $136,297 increase in interest and accretion expense.

Current wording

Consolidated other (expense) income decreased by $922,426 to expense of $1,691,363 in the third quarter of 2024 as compared to $768,937 in expense in the third quarter of 2023. The decrease was primarily related to a $1,435,845 fair value remeasurement loss on the warrant liability, a $587,271 fair value remeasurement gain on the embedded derivative liability, a $199,785 decrease in gain on sale of assets, and a $225,871 decrease in fair value remeasurement loss on the contingent value rights (“CVRs”).

Previous wording

Consolidated operating loss from continuing operations in the second quarter of 2024 was $2,025,944 as compared to $1,415,320 in the second quarter of 2023. Net loss from continuing operations attributable to shareholders in the second quarter of 2024 was $6,934,015, or $(1.11) per diluted share, compared to net loss from continuing operations of $333,810, or $(2.34) per diluted share, in the second quarter of 2023.

Current wording

Consolidated operating loss from continuing operations in the third quarter of 2024 was $1,606,737 as compared to $1,564,350 in the third quarter of 2023. Net loss from continuing operations attributable to shareholders in the third quarter of 2024 (after taking into effect $264,482 in deemed dividends) was $3,563,091, or $(11.77) per diluted share, compared to net loss from continuing operations of $2,329,053, or $(176.35) per diluted share, in the third quarter of 2023.

Previous wording

Consolidated sales decreased $15,133,099, or 36.1% to $26,768,617 in the first six months of 2024 from $41,901,716 in the first six months of 2023. Sales in the first six months of 2024 and 2023 by type were as follows:

Current wording

Consolidated sales decreased $18,703,410, or 31.1% to $41,487,003 in the first nine months of 2024 from $60,190,413 in the first nine months of 2023. Sales in the first nine months of 2024 and 2023 by type were as follows:

Previous wording

Residential contract sales decreased $2,691,079, or 18%, due to a 7% reduction in residential kilowatts installed and also a decrease in average price per system installed as result of lower financing fees and lower battery attachment rate. The residential market within the solar industry is seeing an overall decline in installations due to higher interest rates. Commercial contract sales decreased $3,268,061, or 87%, due to a delay in the start of commercial pipeline projects into the second half of 2024.

Current wording

Residential contract sales decreased $14,134,291, or 29%, due to a 17% reduction in residential kilowatts installed and also a decrease in average price per system installed as result of lower financing fees and lower battery attachment rate. Overall theacceleration of projects in the last quarter of 2023 led to approval bottlenecks at the outset of 2024 which was further hampered by some supply chain disruption from a change in suppliers. The residential market within the solar industry is seeing an overall decline in installations due to higher interest rates. Commercial contract sales decreased $3,682,512, or 42%, due primarily to a delay in the start of commercial pipeline projects into the second half of 2024.

Previous wording

Consolidated gross profit decreased to $9,597,802 in the first six months of 2024 as compared to gross profit of $15,143,250 in the first six months of 2023 due primarily to the decrease in revenue during the quarter. Gross margin remained flat at 36% during each of the first six months of 2024 and the first six months of 2023.

Current wording

Consolidated gross profit decreased to $14,833,527 in the first nine months of 2024 as compared to gross profit of $22,175,708 in the first nine months of 2023 due primarily to the decrease in revenue during the quarter. Gross margin decreased slightly to 36% during the first nine months of 2024 from 37% during the first nine months of 2023 due primarily to certain fixed costs on lower revenue.

Previous wording

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement gain of SUNation earnout consideration, decreased to $13,806,700 in the first six months of 2024 as compared to $18,708,095 in the first six months of 2023. Consolidated selling, general and administrative expenses decreased $2,104,728, or 14%, to $13,187,950 in the first six months of 2024 from $15,292,678 in the first six months of 2023, due primarily to a $427,259 decrease in stock compensation expense, decreased sales and marketing expense, including commissions, on lower revenue in the quarter, and decreased personnel expenses on lower headcount. Amortization expense decreased by $1,064,647 to $1,418,750 in the first six months of 2024 as compared to $2,483,397 in the same period of the prior year due to the completion of the amortization of certain intangible assets in late 2023. The fair value remeasurement related to the SUNation acquisition earnout consideration in the first six months of 2024 was a gain of $800,000 compared to a loss of $930,000 in the same period of the prior year.

Current wording

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, and a fair value remeasurement gain of SUNation earnout consideration, decreased to $20,649,162 in the first nine months of 2024 as compared to $27,304,903 in the first nine months of 2023. Consolidated selling, general and administrative expenses decreased $3,123,771, or 14%, to $19,321,037 in the first nine months of 2024 from $22,444,808 in the first nine months of 2023, due primarily to a $983,024 decrease in stock compensation expense, decreased sales and marketing expense, including commissions, on lower revenue in the period, and decreased personnel expenses on lower headcount. Amortization expense decreased by $1,571,970 to $2,128,125 in the first nine months of 2024 as compared to $3,700,095 in the same period of the prior year due to the completion of the amortization of certain intangible assets in late 2023. The fair value remeasurement related to the SUNation acquisition earnout consideration in the first nine months of 2024 was a gain of $800,000 compared to a loss of $1,160,000 in the same period of the prior year.

Previous wording

Consolidated other (expense) income decreased by $2,157,139 to expense of $1,522,937 in the first six months of 2024 as compared to $634,202 in income in the first six months of 2023. The decrease was primarily related to a $442,950 increase in interest and accretion expense, a $1,055,600 fair value remeasurement loss on the embedded derivative liability, and a $899,335 decrease in fair value remeasurement gain on the CVRs, partially offset by a $461,022 fair value remeasurement gain on the warrant liability.

Current wording

Consolidated other (expense) income decreased by $3,079,565 to expense of $3,214,300 in the first nine months of 2024 as compared to $134,735 in expense in the first nine months of 2023. The decrease was primarily related to a $444,833 increase in interest and accretion expense, a $468,329 fair value remeasurement loss on the embedded derivative liability, a $673,464 decrease in fair value remeasurement gain on the CVRs, a $974,823 fair value remeasurement loss on the warrant liability, and a $437,938 decrease in gain on sale of assets.

Previous wording

Consolidated operating loss from continuing operations in the first six months of 2024 was $4,208,898 as compared to $3,564,845 in the first six months of 2023. Net loss from continuing operations attributable to shareholders in the first six months of 2024 (after taking into effect $11,322,639 in deemed dividends) was $17,054,003, or $(3.83) per diluted share, compared to net loss from continuing operations of $2,933,481, or $(4.43) per diluted share, in the first six months of 2023.

Current wording

Consolidated operating loss from continuing operations in the first nine months of 2024 was $5,815,635 as compared to $5,129,195 in the first nine months of 2023. Net loss from continuing operations attributable to shareholders in the first nine months of 2024 (after taking into effect $11,587,121 in deemed dividends) was $20,617,094, or $(128.25) per diluted share, compared to net loss from continuing operations of $5,262,534, or $(395.75) per diluted share, in the first nine months of 2023.

Previous wording

As of June 30, 2024, the Company had $2,132,055 in cash, restricted cash and cash equivalents. Of this amount, $1,225,988 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash.

Current wording

As of September 30, 2024, the Company had $2,162,086 in cash, restricted cash and cash equivalents. Of this amount, $1,240,882 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash.

Previous wording

Of the amounts of cash, restricted cash and cash equivalents on the balance sheet at June 30, 2024, $1,085,712 consisted of funds that can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business.

Current wording

Of the amounts of cash, restricted cash and cash equivalents on the balance sheet at September 30, 2024, $1,099,763 consisted of funds that can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business.

Previous wording

The Company had working capital deficit of $(11,600,420) at June 30, 2024, consisting of current assets of $12,230,447 and current liabilities of $23,830,867 compared to working capital deficit of $(6,594,834) at December 31, 2023.

Current wording

The Company had working capital deficit of $(13,243,267) at September 30, 2024, consisting of current assets of $11,682,522 and current liabilities of $24,925,789 compared to working capital deficit of $(6,594,834) at December 31, 2023.

Previous wording

Cash used in operating activities was $3,425,726 in the first six months of 2024 as compared to $1,660,982 in the same period of 2023. Significant working capital changes in the six months ended June 30, 2024 included an increase in accounts payable of $822,503, a decrease in customer deposits of $774,524, and an increase in other accrued liabilities of $758,737 due to an increase in deferred revenue on upcoming commercial projects.

Current wording

Cash used in operating activities was $4,393,846 in the first nine months of 2024 as compared to $825,114 in the same period of 2023. Significant working capital changes in the nine months ended September 30, 2024 included a decrease of accounts receivable of $803,047, a decrease in inventories of $893,281, an increase in accounts payable of $570,844, a decrease in accrued compensation and benefits for $510,484, and an increase in other assets, primarily due to an increase in costs and estimated earnings in excess of billings as we are completing commercial projects in the quarter.

Previous wording

Net cash used in investing activities was $11,461 in the first six months of 2024 compared to $2,301,591 provided by investing activities in the same period of 2023. Net cash provided in the 2023 period was the result of proceeds from the sale of investments, proceeds from the sale of JDL and Ecessa assets included within discontinued operations, partially offset by capital expenditures.

Current wording

Net cash used in investing activities was $23,631 in the first nine months of 2024 compared to $3,608,534 provided by investing activities in the same period of 2023. Net cash provided in the 2023 period was the result of proceeds from the sale of investments, proceeds from the sale of JDL and Ecessa assets included within discontinued operations, partially offset by capital expenditures.

Previous wording

Net cash provided by financing activities was $172,899 in the first six months of 2024 compared to $791,378 in the same period of 2023. Net cash provided by financing activities in the first six months of 2024 was due to $1,000,000 in proceeds from the issuance of common stock under a registered direct offering, partially offset by payments against loans payable. Net cash provided by financing activities in the six months of 2023 was due to $7,500,000 in borrowings from Decathlon Specialty Finance, LLC (“Decathlon”), partially offset by $5,000,000 in payments against the SUNation Short-Term Note and $1,500,000 in payments against the Hercules Capital, Inc. (“Hercules”) term loan.

Current wording

Net cash provided by financing activities was $1,183,220 in the first nine months of 2024 compared to $2,446,496 used in the same period of 2023. Net cash provided by financing activities in the first nine months of 2024 was due to $1,000,000 in proceeds from the issuance of common stock under a registered direct offering and $1,604,000 in borrowings from Conduit Capital US Holdings LLC (“Conduit”) and MBB Energy, LLC (“MBB”), partially offset by payments against loans payable. Net cash used in financing activities in the nine months of 2023 was due to $3,036,676 in CVR distribution payments, $5,000,000 in payments against the SUNation Short-Term Note and $1,500,000 in payments against the Hercules Capital, Inc. (“Hercules”) term loan, partially offset by $7,500,000 in borrowings from Decathlon Specialty Finance, LLC (“Decathlon”).

Previous wording

In connection with the SUNation acquisition, on November 9, 2022, the Company issued a $5,000,000 Short-Term Limited Recourse Secured Promissory Note(the “Short-Term Note”) and a $5,486,000 Long-Term Promissory Note(the “Long-Term Note”). The Short-Term Note was secured as described below and was scheduled to mature on August 9, 2023. It carried an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full. The Short-Term Note was paid in full in conjunction with the Decathlon loan. The Long-Term Note is unsecured and matures on November 9, 2025. It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full. The Company will be required to make a principal payment of $2.74 million on the second anniversary of the Long-Term Note. The Long-Term Note may be prepaid at our option at any time without penalty.

Current wording

In connection with the SUNation acquisition, on November 9, 2022, the Company issued a $5,000,000 Short-Term Limited Recourse Secured Promissory Note(the “Short-Term Note”) and a $5,486,000 Long-Term Promissory Note(the “Long-Term Note”). The Short-Term Note was secured as described below and was scheduled to mature on August 9, 2023. It carried an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full. The Short-Term Note was paid in full in conjunction with the Decathlon loan. The Long-Term Note is unsecured and matures on November 9, 2025. It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full. The Company was required to make a principal payment of $2.74 million on the second anniversary of the Long-Term Note. The Long-Term Note may be prepaid at our option at any time without penalty.

Previous wording

Based on the Company’s current financial position, the Company did not have sufficient cash to make the first SUNation earnout payment, which was due on May 6, 2024, and the Company’s forecasted future cash flows for the twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to make the first principal payment of the Long-Term Note that is due on November 9, 2024, a factor which raises substantial doubt about the ability of the Company to continue as agoing concern for a reasonable period of time. Notwithstanding the Company’s ability to make such payments, the Company is not permitted to make any earnout payments under the SUNation Transaction Agreement or any payments under the Long-Term Note unless Decathlon has provided prior written consent to such payment pursuant to the Company’s Revenue Loan and Security Agreement, dated as of June 1, 2023, by and among the Company, Decathlon, and the other parties thereto (the “Loan Agreement”). Pursuant to that certain subordination letter dated May 31, 2023, each holder of the Long-Term Note has subordinated all payments under the Long-Term Note to the obligations owed to Decathlon under the Loan Agreement (the “Decathlon Obligations”) and has agreed that, until the Decathlon Obligations have been paid in full, any payment under the Long-Term Note is subject to Decathlon’s prior written consent. Therefore, if Decathlon does not consent to the first principal payment of the Long-Term Note, such non-payment will not result in a default under the Long-Term Note. Failure to make earnout payments under the SUNation Transaction Agreement, which are prohibited under the Loan Agreement, could result in a breach under the SUNation Transaction Agreement.

Current wording

Based on the Company’s current financial position, the Company did not have sufficient cash to make the first SUNation earnout payment, which was due on May 6, 2024, or the first principal payment of the Long-Term Note that was due on November 9, 2024, a factor which raises substantial doubt about the ability of the Company to continue as agoing concern for a reasonable period of time. Notwithstanding the Company’s ability to make such payments, the Company is not permitted to make any earnout payments under the SUNation Transaction Agreement or any payments under the Long-Term Note unless Decathlon has provided prior written consent to such payment pursuant to the Company’s Revenue Loan and Security Agreement, dated as of June 1, 2023, by and among the Company, Decathlon, and the other parties thereto (the “Loan Agreement”). Pursuant to that certain subordination letter dated May 31, 2023, each holder of the Long-Term Note has subordinated all payments under the Long-Term Note to the obligations owed to Decathlon under the Loan Agreement (the “Decathlon Obligations”) and has agreed that, until the Decathlon Obligations have been paid in full, any payment under the Long-Term Note is subject to Decathlon’s prior written consent. Therefore, if Decathlon does not consent to the first principal payment of the Long-Term Note, such non-payment will not result in a default under the Long-Term Note. Failure to make earnout payments under the SUNation Transaction Agreement, which are prohibited under the Loan Agreement, could result in a breach under the SUNation Transaction Agreement.

Previous wording

As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition. To the extent that additional funds are raised through the sale of equity or securities convertible into or exercisable for equity securities, the issuance of securities will result in dilution to the Company’s shareholders. Further, certain transactions could trigger an adjustment to the exercise price of the Convertible Preferred Stock and PIPE Warrants, which would lead toa corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.

Current wording

As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. On October 21, 2024, the Company entered into an At the Market (“ATM”) Offering Agreement to sell shares up to $10,000,000. While the Company has raised over $2 million to date, it is not sufficient to be able to cover all of the Company’s outstanding obligations. Additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition. To the extent that additional funds are raised through the sale of equity or securities convertible into or exercisable for equity securities, the issuance of securities will result in dilution to the Company’s shareholders.

Previous wording

The Company issued CVRs prior to the Closing to CSI shareholders of record on the close of business on March 25, 2022. The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the 24-month period following the Closing. The CVR liability as of June 30, 2024 was estimated at $1,198,212 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date. This amount is recorded as a current liability that includes the remaining restricted cash and cash equivalents, investments, along with the other tangible and intangible assets related to the legacy CSI business. The proceeds from CSI’s pre-merger business working capital and related long-term assets and liabilities are not available to fund the working capital needs of the post-merger company.

Current wording

The Company issued CVRs prior to the Closing to CSI shareholders of record on the close of business on March 25, 2022. The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the 24-month period following the Closing. The CVR liability as of September 30, 2024 was estimated at $1,212,263 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date. This amount is recorded as a current liability that includes the remaining restricted cash and cash equivalents, investments, along with the other tangible and intangible assets related to the legacy CSI business. The proceeds from CSI’s pre-merger business working capital and related long-term assets and liabilities are not available to fund the working capital needs of the post-merger company.

Previous wording

Convertible Preferred Stock and Warrants: In March 2022, the Company issued shares of Series A convertible preferred stock (the “Convertible Preferred Stock”) and PIPE Warrants to investors as part of a $32.0 million private investment in public equity (“PIPE”) transaction. The proceeds from the issuance of the Convertible Preferred Stock were allocated between the Convertible Preferred Stock and PIPE Warrants using a relative fair value method. The Company accounts for the Convertible Preferred Stock and PIPE Warrants based on an assessment of the specific terms and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”. The Convertible Preferred Stock was originally reported as part of permanent equity and the PIPE Warrants were originally determined to be equity-classified. As discussed in Notes 10 and 11, the Convertible Preferred Stock and PIPE Warrants were modified during the first quarter of 2024, which resulted in the Company not having sufficient authorized and unissued shares to settle the conversion and exercise to common stock and the reclassification of the Convertible Preferred Stock to mezzanine equity and the PIPE Warrants to a liability.

Current wording

Convertible Preferred Stock and Warrants: In March 2022, the Company issued shares of Series A convertible preferred stock (the “Convertible Preferred Stock”) and PIPE Warrants to investors as part of a $32.0 million private investment in public equity (“PIPE”) transaction. The proceeds from the issuance of the Convertible Preferred Stock were allocated between the Convertible Preferred Stock and PIPE Warrants using a relative fair value method. The Company accounts for the Convertible Preferred Stock and PIPE Warrants based on an assessment of the specific terms and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”. The Convertible Preferred Stock was originally reported as part of permanent equity and the PIPE Warrants were originally determined to be equity-classified. As discussed in Notes 10 and 11, the Convertible Preferred Stock and PIPE Warrants were modified during the first quarter of 2024, which resulted in the Company not having sufficient authorized and unissued shares to settle the conversion and exercise to common stock and the reclassification of the Convertible Preferred Stock to mezzanine equity and the PIPE Warrants to a liability. During the third quarter of 2024, the Company received the appropriate shareholder approval on an increase in authorized shares and the Convertible Preferred Stock and PIPE Warrants were reclassified to equity.

Previous wording

Embedded Derivative Liability: The Company’s Decathlon Fixed Loan includes a mandatory prepayment feature upon a contingent event that is considered an embedded derivative that requires bifurcation under ASC 815. Under ASC 815, the embedded derivative is bifurcated and recorded at fair value at inception and each subsequent reporting period. However, based on management’s estimates of the likelihood of certain events, the embedded derivative liability had no fair value at issuance and at the end of each of the reporting periods ended prior to June 30, 2024. As of June 30, 2024, the fair value of this embedded derivative was ascribed value. See further discussion in Note 7.

Current wording

Embedded Derivative Liability: The Company’s Decathlon Fixed Loan includes a mandatory prepayment feature upon a contingent event that is considered an embedded derivative that requires bifurcation under ASC 815. The Company’s Conduit and MBB loans include an acceleration of amounts outstanding under the loan agreements upon an event of default or if the Company consummates one or more equity offerings meeting certain criteria that is considered an embedded derivative that requires bifurcation. Under ASC 815, the embedded derivative is bifurcated and recorded at fair value at inception and each subsequent reporting period. However, based on management’s estimates of the likelihood of certain events, the embedded derivative liability related to the Decathlon Fixed Loan had no fair value at issuance and at the end of each of the reporting periods ended prior to June 30, 2024. As of June 30, 2024, the fair value of this embedded derivative was ascribed value. See further discussion in Note 7. The Conduit and MBB embedded derivatives were ascribed a fair value at issuance and were fair valued at September 30, 2024 with the change in fair value recorded within Other (expense) income within the condensed consolidated statements of operations and comprehensive income (loss).