Note 2 – Liquidity, Financial Condition, and Going Concern

The Company has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of approximately $104.8 million and negative working capital of approximately $6.4 million at June 30, 2023, a net loss of approximately $17.0 million, and approximately $8.4 million of net cash used in operating activities for the six months ended June 30, 2023. The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

The Company will seek to obtain additional capital through the sale of debt or equity financings or other arrangements to fund operations including through its existing At-The-Market offering, $10 million Standing Letter of Credit (“SLOC”), the $100 million Line of Credit, and the $50 million Equity Line of Credit (Note 15 Subsequent Event); however, there can be no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit the Company’s ability to pay dividends or make other distributions to stockholders. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern for twelve months from the issuance of these condensed consolidated financial statements.

At-the-Market Offerings

The Company entered into a Sales Agreement with A.G.P./Alliance Global Partners (the “Sales Agents”) dated March 30, 2022 (the “Sales Agreement”), pursuant to which the Company may, from time to time, sell up to $5.0 million in shares (the “Placement Shares”) of the Company’s common stock through the Sales Agents, acting as the Company’s sales agent and/or principal, in a continuous at-the-market offering (the “ATM Offering”). The Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of the Company’s common stock under the Sales Agreement. The Placement Shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333- 262122) and the related base prospectus included in the registration statement, as supplemented by the prospectus supplement dated March 30, 2022.

During the six months ended June 30, 2023, the Company received net proceeds on sales of shares of common stock under the Sales Agreement of approximately $2.1 million (after deducting $0.1 million in commissions and expenses) at a weighted average price of $10.38 per share.

On July 5, 2023, the Company and the Sales Agents filed the second amendment to the Sales Agreement (the “Second Amendment to the Sales Agreement”). Pursuant to the First Amendment to the Sales Agreement, the Company may from time to time, sell up to $5.1 million in Placement Shares of the Company’s common stock through the Sales Agents in a continuous At-the-Market Offering (the Amended ATM Offering”). According to the First Amendment to the Sales Agreement, the Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of its common stock in the Amended ATM Offering.

Subsequent to June 30, 2023, the Company received net proceeds on sales of 545,100 shares of common stock of approximately $1.59 million (after deducting $0.76 million in commissions and expenses) at a weighted average price of $3.05 per share.

Line of Credit

On February 2, 2023, the Company entered into a line of credit agreement (the “Line of Credit”) securing a line of credit up to $100.0 million. The Line of Credit will be used to fund expenses related to the fulfillment of contracts with customers of the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation (See Note 1). The Line of Credit expires February 2, 2024, unless the Line of Credit is extended for one or two additional years in accordance with its terms. On February 2, 2023, the Company drew down $2.0 million under the Line of Credit. Upon drawing down on the Line of Credit, the Company issued a Secured Promissory Note (the “2023 Note”) which is due and payable 60 days from the issuance date (See Note 11).

On May 16, 2023, the Company made a second draw of $0.2 million under the Line of Credit. Upon drawing down on the Line of Credit, the Company issued a second Secured Promissory Note (the “2^nd 2023 Note”) which is due and payable July 16, 2023. The 2^nd 2023 Note shall accrue interest at the fifteen percent (15%) per annum from the original funding date of the 2^nd 2023 Note.

On May 26, 2023, the Company made a third draw of $0.15 million under the Line of Credit. Upon drawing down on the Line of Credit, the Company issued a third Secured Promissory Note (the “3^rd 2023 Note”) which is due and payable June 2, 2023. The 3^rd 2023 Note included a $200,000 Commitment fee and does not bear interest.

On June 13, 2023, the Company partially redeemed the principal amount of the 2023 Note and fully redeemed the principal amount of the 2^nd 2023 Note and 3^rd 2023 Note in addition to all accrued interest and commitment fees owing for approximately $2.1 million.

Demand Notes

Between May 17, 2023 and May 18, 2023, the Company issued secured demand promissory notes (the “Demand Notes”) to certain investors (the “Demand Holders”) in an aggregate principal amount equal to $229,877. The Demand Notes are due and payable at any time upon demand by a Demand Holder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the Demand Notes and (ii) July 16, 2023. The Demand Notes do not bear interest. In connection with the issuance of the Demand Notes, the Company agreed to issue, pending shareholder approval, to the Demand Holders an aggregate of 76,626 shares of the Company’s common stock.

On May 30, 2023, the Company issued secured demand promissory notes (the “2^nd Demand Notes”) to certain investors (the “2^nd Demand Holders”) in an aggregate principal amount equal to $140,804. The 2^nd Demand Notes are due and payable at any time upon demand by a 2^nd Demand Holder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the 2^nd Demand Notes and (ii) July 16, 2023. The 2^nd Demand Notes do not bear interest. In connection with the issuance of the 2^nd Demand Notes, the Company agreed to issue, pending shareholder approval, to the 2^nd Demand Holders an aggregate of 46,935 shares of the Company’s common stock.

Exchange Agreements

On June 4, 2023, the Company entered into Exchange Agreements (the “Exchange Agreements”): (i) with the October Investors for the exchange of October Notes in the aggregate principal amount of $2.6 million for 2,622 shares of the Company’s newly created Series F Convertible Preferred Stock (“Series F Preferred Stock”), in the aggregate; (ii) with the January Investors for the exchange of January Notes in the aggregate principal amount of $0.2 million for 206 shares of Series F Preferred Stock, in the aggregate; (iii) with the Demand Noteholders for the exchange of Demand Notes in the principal amount of $0.6 million for 576 shares of Series F Preferred Stock, in the aggregate; and (iv) with the purchasers of the Company’s Series D Preferred Stock for the exchange of 1,197 shares of Series D Preferred Stock for 1,847 shares of Series F Preferred Stock, in the aggregate.

In addition, in connection with the Exchange Agreements, the Company issued new five-year warrants to purchase an aggregate of 592,129 shares of Common Stock (the “Exchange Warrants”) to the October Investors, the January Investors, and the purchasers of the Company’s Series D Preferred Stock. The Exchange Warrants are exercisable at an exercise price of $8.868 per share of Common Stock, subject to certain adjustments as set forth in the Exchange Warrants. The holders may exercise the Exchange Warrants on a cashless basis if the shares of our Common Stock underlying the Exchange Warrants are not then registered pursuant to an effective registration statement. The Company concluded that the Exchange Warrants are liability classified.

For the October Investors, the total fair value of Series F Preferred Stock and Warrant Liability issued was $1.7 million ($1.1 million for Series F Preferred Stock and $0.6 million for Warrant Liability). For the January Investors, the total fair value of Series F Preferred Stock and Warrant Liability issued was $0.13 million ($0.1 million for Series F Preferred Stock and $0.03 million for the Warrant Liability). For the Demand Note holders, the total fair value of Series F Preferred Stock and Warrant Liability issued was $0.4 million ($0.2 million for Series F Preferred Stock and $0.2 million for the Warrant Liability). For the purchasers of the Company’s Series D Preferred Stock, the Company accounted for the exchange as an extinguishment of the Series D Preferred Stock. The Company recorded the total fair value of Series F Preferred Stock and Warrant Liability of $1.2 million ($0.7 million for Series F Preferred Stock and $0.5 million for the Warrant Liability) and the difference of $0.5 million with the $0.7 million carrying value of the Series D Preferred Stock as a deemed dividend and reduction to additional-paid-in-capital.

Series F-1 Preferred Stock Offering

On June 13, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which, at the closing of the transactions contemplated by the Purchase Agreement (the “Closing”) the Purchasers agreed to purchase an aggregate of 3,583 shares of the Company’s newly created Series F-1 Convertible Preferred Stock (“Series F-1 Preferred Stock”) for an aggregate purchase price of approximately $2.3 million . In addition, in connection with the issuance of the Series F-1 Preferred Stock, the Purchasers will receive five-year warrants to purchase an aggregate of 398,377 shares of Common Stock (defined below) (the “Series F-1 Warrants”). The Series F-1 Warrants will be exercisable at an exercise price of $8.994 per share of the Company’s common stock, subject to certain adjustments as set forth in the Warrants. The holders may exercise the Warrants on a cashless basis if the shares of our Common Stock underlying the Warrants are not then registered pursuant to an effective registration statement. The obligations of the Company and the Purchasers to consummate the transactions contemplated by the Purchase Agreement are subject to the satisfaction on or prior to the Closing of customary closing conditions.

Series F-2 Preferred Stock Offering

On June 14, 2023, the Company entered into a Securities Purchase Agreement (the “F-2 Purchase Agreement”) with certain accredited investors (the “F-2 Purchasers”), pursuant to which, at the closing of the transactions contemplated by the Purchase Agreement (the “F-2 Closing”) the F-2 Purchasers agreed to purchase an aggregate of 1,153 shares of the Company’s newly created Series F-2 Convertible Preferred Stock (“Series F-2 Preferred Stock”) for an aggregate purchase price of approximately $0.7 million. In addition, in connection with the issuance of the Series F-2 Preferred Stock, the F-2 Purchasers will receive five-year warrants to purchase an aggregate of 124,946 shares of Common Stock (defined below) (the “F-2 Warrants”). The F-2 Warrants will be exercisable at an exercise price of $9.228 per share of Common Stock, subject to certain adjustments as set forth in the F-2 Warrants. The holders may exercise the F-2 Warrants on a cashless basis if the shares of our Common Stock underlying the F-2 Warrants are not then registered pursuant to an effective registration statement. The obligations of the Company and the F-2 Purchasers to consummate the transactions contemplated by the F-2 Purchase Agreement are subject to the satisfaction on or prior to the F-2 Closing of customary closing conditions.

Risks and Uncertainties

The Company is currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine. The Company’s financial condition and results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.

The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.