SEC Filing | Molekule, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-41096

Molekule Group, Inc.

(Exact name of Registrant as Specified in Its Charter)


Delaware	45-3213164

(State of Incorporation)	(I.R.S. Employer Identification No.)

10455 Riverside Dr.

Palm Beach Gardens, FL 33410

833-652-5326

(Address, including zip code, and telephone number, including area code, of principal executive offices of registrant)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 Par Value	MKUL	The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant has one class of common stock, $0.01 par value, of which 34,654,459 shares were outstanding as of August 9, 2023.

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MOLEKULE GROUP INC.

FORM 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022 (Audited)	1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited)	2

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited)	3

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures About Market Risk	32

Item 4. Controls and Procedures	32

PART II - OTHER INFORMATION	32

Item 1. Legal Proceedings	32

Item 1A. Risk Factors	33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3. Defaults Upon Senior Securities	33

Item 4. Mine Safety Disclosures	33

Item 5. Other Information	33

Item 6. Exhibits	33

SIGNATURES	35

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

MOLEKULE GROUP, INC. AND SUBSIDIARIES (f/k/a AEROCLEAN TECHNOLOGIES, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2023		December 31, 2022
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash	$	5,269,376	$	22,062,657
Restricted Cash		629,742		—
Accounts receivable, net		2,210,700		36,188
Prepaid expenses and other current assets		1,801,533		665,395
Inventories		29,432,880		2,020,713
Total current assets		39,344,231		24,784,953
Property and equipment, net		8,626,031		2,119,134
Intangible assets, net		45,301,689		—
Goodwill		21,031,064		626,647
Operating lease right-of-use assets		10,952,143		1,606,485
Other assets		184,854		21,667
Total assets	$	125,440,012	$	29,158,886

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,568,044	$	3,220,082
Accrued expenses and other current liabilities		5,868,740		1,228,402
Current operating lease liabilities		2,746,961		113,769
Notes payable, current portion		2,112,710		—
Total current liabilities		17,296,455		4,562,253
Long-term liabilities:
Warrant liability, at fair value		23,634,000		3,372,000
Notes payable, net of current portion		34,054,482		—
Long-term operating lease liabilities		8,245,493		1,521,431
Deferred tax liability		1,504,526		—
Total liabilities		84,734,956		9,455,684
Stockholders’ equity:
Common stock, $0.01 par value per share; 110,000,000 shares authorized; 34,046,500 and 15,496,932 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		340,465		154,969
Additional paid-in capital		83,184,034		27,465,024
Accumulated deficit		(42,819,443)		(7,916,791)
Total stockholders’ equity		40,705,056		19,703,202
Total liabilities and stockholders’ equity	$	125,440,012	$	29,158,886

See accompanying notes to unaudited condensed consolidated financial statements.

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MOLEKULE GROUP, INC. AND SUBSIDIARIES (f/k/a AEROCLEAN TECHNOLOGIES, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Product revenues	$	13,242,959	$	70,918	$	21,592,380	$	77,652
Cost of sales		8,763,888		36,126		13,438,147		39,890
Gross profit		4,479,071		34,792		8,154,233		37,761
Operating expenses:
Selling, general and administrative		15,005,356		4,105,066		28,666,969		6,247,290
Research and development		1,174,846		579,061		1,422,625		1,110,544
Total operating expenses		16,180,202		4,684,127		30,089,594		7,357,834
Loss from operations		(11,701,131)		(4,649,335)		(21,935,361)		(7,320,073)
Change in fair value of warrant liability		(12,050,500)		(650,000)		(10,324,500)		(650,000)
Interest expense		(1,443,009)		—		(2,691,686)		—
Other expense		132,242		—		(44,257)		—
Total other expense		(1,310,767)		—		(2,735,943)
Loss before income tax benefit		(25,062,398)		(5,299,335)		(34,995,804)		(7,970,073)
Income tax benefit		93,156		(127,058)		93,156		(219,832)
Net loss	$	(24,969,242)	$	(5,172,277)	$	(34,902,648)	$	(7,750,241)
Net loss per share:
Basic and diluted	$	(0.76)	$	(0.37)	$	(1.12)	$	(0.56)
Weighted-average common shares outstanding:
Basic and diluted		33,017,565		13,894,119		31,185,329		13,885,923

See accompanying notes to the unaudited condensed consolidated financial statements.

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MOLEKULE GROUP, INC. AND SUBSIDIARIES (f/k/a AEROCLEAN TECHNOLOGIES, INC.) CONDENSED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

THREE AND SIX MONTHS ENDED JUNE 30, 2023:


	Common Stock			Additional Paid-In		Accumulated		Total Stockholders’
	Shares	Amount		Capital		Deficit		Equity
Balance, March 31, 2023	30,427,750	$	304,277	$	81,284,515	$	(17,850,199)	$	63,738,593
Issuance of common stock and warrants	3,400,000		34,000		—		—	$	34,000
Stock-based compensation	—		—		1,901,707		—		1,901,707
Issuance of restricted stock units	218,750		2,188		(2,188)		—		—
Net loss	—		—		—		(24,969,244)		(24,969,244)
Balance, June 30, 2023	34,046,500	$	340,465	$	83,184,034	$	(42,819,443)	$	40,705,056


	Common Stock			Additional Paid-In		Accumulated		Total Stockholders’
	Shares	Amount		Capital		Deficit		Equity
Balance, December 31, 2022	15,496,932	$	154,969	$	27,465,024	$	(7,916,792)	$	19,703,201
Acquisition of Molekule, Inc.	14,930,818		149,308		52,316,767		—		52,466,075
Issuance of restricted stock units	3,400,000		34,000						34,000
Stock-based compensation	—		—		3,404,431		—		3,404,431
Transactions related to employee share-based compensation plan	218,750		2,188		(2,188)		—		—
Net loss	—		—		—		(34,902,650)		(34,902,650)
Balance, June 30, 2023	34,046,500	$	340,465	$	83,184,034	$	(42,819,443)	$	40,705,056

THREE AND SIX MONTHS ENDED JUNE 30, 2022:


	Common Stock			Additional Paid-In		Accumulated		Total Stockholders’
	Shares	Amount		Capital		Deficit		Equity
Balance, March 31, 2022	13,877,636	$	138,776	$	23,990,337	$	(4,325,824)	$	19,803,289
Issuance of equity units	1,531,192		15,000		894,770		—		909,770
Stock-based compensation	—		—		708,540		—		708,540
Net loss	—		—		—		(5,172,277)		(5,172,277)
Balance, June 30, 2022	15,408,828	$	153,776	$	25,593,647	$	(9,498,101)	$	16,249,322


	Common Stock			Additional Paid-In		Accumulated		Total Stockholders’
	Shares	Amount		Capital		Deficit		Equity
Balance, December 31, 2021	13,877,636	$	138,776	$	23,319,499	$	(1,747,860)	$	21,710,415
Issuance of common stock	1,531,192		15,000		894,770		—		909,770
Stock - based compensation	—		—		1,379,378		—		1,379,378
Net loss	—		—		—		(7,750,241)		(7,750,241)
Balance, June 30, 2022	15,408,828	$	153,776	$	25,593,647	$	(9,498,101)	$	16,249,322

See accompanying notes to the unaudited condensed consolidated financial statements.

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MOLEKULE GROUP, INC. AND SUBSIDIARIES (f/k/a AEROCLEAN TECHNOLOGIES, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(34,902,648)	$	(7,750,241)
Adjustments to reconcile net loss to net cash used in operating activities:
Other non cash expense		—		—
Offering costs associated with warrant liability		—		1,326,212
Change in fair value of warrant liability		10,324,500		650,000
Deferred tax benefit		(93,156)		(219,832)
Depreciation and amortization		1,082,488		72,047
Equity-based compensation		3,404,431		1,379,378
Provision for doubtful accounts		2,107		—
Amortization of debt discounts		188,088		—
Changes in operating assets and liabilities:
Accounts receivable		(1,798,424)		149,009
Inventories		3,669,072		(358,755)
Other current and non-current assets		664,757		596,390
Accounts payable		(8,746,224)		(239,431)
Accrued expenses and other liabilities		(1,136,152)		82,517
Operating lease liabilities		11,390		—
Net cash used in operating activities		(27,329,771)		(4,312,706)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,196,104)		(154,065)
Cash acquired in acquisition of Molekule Inc.		2,988,096		—
Net cash provided by investing activities		1,791,992		(154,065)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants		9,971,500		15,000,000
Repayment of notes payable		(597,260)		—
Payment of issuance costs		—		(999,449)
Net cash provided by financing activities		9,374,240		14,000,551

Net decrease in cash		(16,163,539)		9,533,780
Cash and restricted cash, beginning of period		22,062,657		19,629,649
Cash and restricted cash, end of period	$	5,899,118	$	29,163,429


Supplemental schedule of non-cash activities:
Offering costs in private placement	$	—	$	422,000
Cash paid for interest	$	2,267,306	$	—
Supplemental schedule of investing activities:
Net asset acquired from Molekule Inc.	$	52,466,073	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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MOLEKULE GROUP, INC. (f/k/a AEROCLEAN TECHNOLOGIES, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Description of Business

Molekule Group, Inc. (f/k/a AeroClean Technologies, Inc.) (the “Company”) was initially formed as CleanCo Bioscience Group LLC (“CBG”) in the State of Florida on September 2, 2011. Subsequent to its formation, CBG established a team of scientists, engineers and medical experts to provide solutions for the challenges posed by harmful airborne pathogens and resultant hospital acquired infections. On September 15, 2020, CBG converted into AeroClean Technologies, LLC as a Delaware limited liability company. On November 23, 2021, AeroClean Technologies, LLC incorporated in the state of Delaware as AeroClean Technologies, Inc. The Company is an interior space air purification technology company focused on the sale and distribution of its high-performance interior air sterilization and disinfection products for the eradication of coronavirus and other harmful airborne pathogens. The Company was established to develop technology-driven, medical-grade air purification solutions for hospitals and other healthcare settings. The company is headquartered in Palm Beach Gardens, Florida.

On January 12, 2023, in connection with the acquisition of Molekule, Inc. (“Legacy Molekule”), the Company changed its name from AeroClean Technologies, Inc. to Molekule Group, Inc. (see Note 3). With the acquisition of Legacy Molekule, the Company is engaged in the manufacturing and selling of air purifiers and filters primarily in the United States, but also in Canada directly to consumers, through retail and distribution, and to commercial and enterprise customers. During 2020, Legacy Molekule began selling directly to distributors in Japan and South Korea. During 2021, Legacy Molekule also began selling directly to consumers in Europe. In 2022, sales continued to be primarily within the United States. Legacy Molekule incorporated in the state of Delaware in February 2015 as Transformair, Inc. and changed its name to Molekule, Inc. through an amendment to its articles of incorporation in June 2016. The accompanying condensed consolidated financial statements include the results of Legacy Molekule and its wholly owned subsidiary in the current period from the date of acquisition (January 12, 2023) and as of the most recent balance sheet date (June 30, 2023) and the results of GSI Germsweepusa Inc. (doing business as GSI Technology) (“GSI Technology”), which was acquired in 2022.

Liquidity and Going Concern

The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements — Going Concern (ASC 205-40) require management to assess an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. In each reporting period (including interim periods), an entity is required to assess conditions known and reasonably knowable as of the financial statement issuance date to determine whether it is probable an entity will not meet its financial obligations within one year from the financial statement issuance date. Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate it is probable the entity will be unable to meet its financial obligations as they become due within one year after the date the financial statements are issued.

The Company incurred a net loss of $34,902,648 during the six months ended June 30, 2023 and its net cash used in operating activities was $27,329,771 for the six months ended June 30, 2023. In addition, the Company’s accumulated deficit was $42,819,441 at June 30, 2023. The Company’s recurring losses from operations, recurring cash used in operating activities, accumulated deficit, expected working capital needs to fund its combined operations and new debt obligations as a result of the acquisition of Molekule, Inc. in January 2023 (see Note 3), raise substantial doubt about its ability to continue as a going concern. The Company’s ability to fund its operations is dependent upon management’s plans, which include raising capital, managing costs and generating sufficient revenues to offset costs. There can be no assurances that the Company will be able to secure any such additional financing on acceptable terms and conditions, or at all. Accordingly, management has concluded there is substantial doubt as to the Company’s ability to continue as a going concern within one year after the date the financial statements were issued. Under its debt agreements (the Senior Term Loan and the Mezzanine Term Loan) with its lender, Silicon Valley Bank, now a division of First Citizens Bank (“SVB”), the Company is required to generate revenue of at least $50 million for the twelve months ended March 31, 2024. Non-compliance with this requirement may result in the debt maturity dates becoming accelerated.

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2. Summary of Significant Accounting Policies

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the U. S. Securities and Exchange Commission (the “SEC”) and include the Company’s wholly owned subsidiaries, GSI Technology, for the current period and Legacy Molekule since January 12, 2023. All significant intercompany accounts and transactions have been eliminated in consolidation.

Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet as of June 30, 2023 has been derived from the Company’s unaudited condensed consolidated financial statements at such date. All adjustments that, in the opinion of the Company’s management, are considered necessary for a fair presentation of the results of operations for the periods shown have been reflected in these unaudited condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full 2023 fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2022, contained in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2022.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Significant estimates in these unaudited condensed consolidated financial statements include those related to the fair value of equity-based compensation, revenue recognition, the incremental borrowing rate for leases, the fair value of warrant liability, valuation in connection with business combination and the deferred tax valuation allowance. On an ongoing basis, the Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Due to the inherent uncertainty involved in making estimates, actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments with maturities at the date of investment of not more than three months. The Company held no cash equivalents as of June 30, 2023 and 2022.

Restricted Cash

The Company had a restricted cash balance of $629,742 as of June 30, 2023 and nil as of December 31, 2022. The restricted cash balance constitutes collateral pursuant to the terms of an office lease. The restricted cash balance is held in a separate bank account.

Revenue Recognition

The Company recognizes revenues related to sales of products upon the customer obtaining control of promised goods, in an amount that reflects the consideration that is expected to be received in exchange for those goods. To determine revenue recognition for arrangements within the scope of ASC Topic 606, Revenue from Contracts with Customers, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company generates substantially all its revenue from sales contracts with customers. While the Company enters into separate sales contracts with each customer, all sales contracts are similarly structured. These contracts create an obligation to transfer product to the customer. Sales of purifier devices and filters are separate performance obligations. The Company

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allocates the transaction price to filters based upon their standalone sales price. The transaction price allocated to the device is estimated based on the residual method, as the devices do not have an established standalone sales price and are never sold without filters.

All performance obligations are satisfied within one year; therefore, costs to obtain contracts are expensed as incurred. There is no financing component because the Company expects, at contract inception, the period between when the Company transfers product to the customer and when the customer pays for the product will be less than one year. Sales terms allow for the right of return, and the Company has recorded a related reserve based on historical, as well as post year-end, activity. Customers may, for any reason, return the product within 30 days for a full refund, excluding shipping charges. The Company establishes a liability for expected returns representing the amount of consideration the entity does not expect to be entitled to because it will be refunded to customers. The refund liability is remeasured at each reporting date to reflect changes in the estimate, with a corresponding adjustment to revenues. The Company satisfies the performance obligations and records revenues when transfer of control has passed to the customer based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product.

Sales taxes collected from customers are not recorded within revenues and are remitted to the taxing authorities periodically. Shipping and handling are recorded in revenues and cost of revenues on the Statements of Operations and are charged to customers at varying rates.

The Company recognized revenue of $13,242,959 and $70,918 in the three months ended June 30, 2023 and 2022, respectively, and $21,592,380 and $77,652 for the six months ended June 30, 2023 and 2022, respectively.

Warranty Cost

The Company provides a three-year warranty on its Pūrgo device and a two year warranty for the Legacy Molekule devices, in each case, from the date of sale to its customers. The Company’s policy is to record a provision for estimated future costs related to warranty expense when they are probable and reasonably estimable, which is when revenue is recognized. There was a warranty accrual of $385,748 as of June 30, 2023 and nil as of December 31, 2022.

Income Taxes

Income taxes are accounted for under ACS 740 utilizing the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carry forwards are expected to be recovered, settled or utilized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. If such an event occurs, a valuation allowance is recorded. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon examination. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits as income tax expense. At June 30, 2023 and December 31, 2022, the company did not record any uncertain tax positions.

Research & Development Expenses

Research and development expenses are expensed as incurred and consist principally of contract labor and third-party engineering, product development and testing costs related to the development of medical grade air purification devices and related components as well as concepts for future product development.

Stock-Based Compensation

The Company accounts for share-based payments to employees and non-employees in accordance with the provisions of FASB

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ASC 718, Compensation — Stock Compensation (“ASC 718”). Under ASC 718, the Company measures the share-based compensation cost on the date of grant, based on the fair value of the award, and expense is recognized over the requisite service period.

Accounts Receivable

Trade accounts receivable are stated net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by review of their current credit information. The Company estimates the allowance for doubtful accounts based on review and analysis of specific customer balances that may not be collectible and how recently payments have been received. The Company also evaluates the need for a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Accounts are considered for write-off when they become past due and when it is determined that the probability of collection is remote. For more information on the adoption of Topic 326 Current Expected Credit Losses, see Recent Accounting Pronouncements.

Inventories

The Company values inventories at the lower of cost or net realizable value using the first-in, first-out or weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The costs related to inbound freight, tariffs and fees related to the purchases of inventories, are capitalized as part of the ending inventory, with the net change recorded as a component of cost of revenue.

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value in accordance with U.S. GAAP. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy that prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1

Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2

Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data.

Level 3

Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

At June 30, 2023 and December 31, 2022, the carrying amounts of the Company’s financial instruments, including cash and restricted cash, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximated their respective fair value due to the short-term nature of these instruments.

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Financial Instruments – Derivatives

The Company evaluates its financial instruments to determine if the financial instrument itself or any embedded component of a financial instrument potentially qualifies as a derivative required to be separately accounted for in accordance with FASB ASC 815, Derivatives and Hedging. The accounting for warrants issued to purchase shares of common stock of the Company is based on the specific terms of the respective warrant agreement. A warrant classified as a derivative liability is initially measured at its issue-date fair value, with such fair value subsequently adjusted at each reporting period, with the resulting fair value adjustment recognized as other income or expense. Upon the occurrence of an event resulting in the warrant liability being subsequently classified as equity, or the exercise of the warrant or the conversion option, the fair value of the derivative liability will be adjusted on such date-of-occurrence, with such date-of-occurrence fair value adjustment recognized as other income or expense, and then the derivative liability will be derecognized at such date-of-occurrence fair value.

Debt Issuance Costs

Costs incurred in connection with the issuance of any new term debt are treated as debt discount and recorded as a reduction of the debt balance. The Company amortized debt discount costs over the term of the related debt using the effective interest method.

Goodwill and Intangible Assets

The Company has recorded intangible assets, and goodwill, in connection with business combinations. Estimated useful lives of amortizable intangible assets are determined by management based on an assessment of the period over which the asset is expected to contribute to future cash flows.

In accordance with U.S. GAAP for goodwill and other indefinite-lived intangibles, the Company tests these assets for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred. For the purposes of that assessment, the Company has determined to assign assets acquired in business combinations to a single reporting unit including all goodwill and indefinite-lived intangible assets acquired in business combinations.

Business Acquisition Accounting

The Company applies the acquisition method of accounting for acquisitions that meet the criteria of a business combination. The Company allocates the purchase price of its business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference between the total purchase consideration and the sum of the fair values of acquired tangible and identifiable intangible assets less the fair value of the liabilities assumed is recorded as goodwill. Transaction costs are expensed as incurred in general and administrative expenses.

Recent Accounting Pronouncements

The Company has reviewed recent accounting pronouncements and, with the exception of the below, concluded they are either not applicable to the business or no material effect is expected on the financial statements as a result of future adoption.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses, which was subsequently amended by ASU No. 2018-19 and ASU No. 2019-10, and which requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to members’ equity in the period of adoption. The Company adopted ASU 2016-13 and related amendments as of January 1, 2023, and the adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

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3. Business Combination

On January 12, 2023, the Company completed the acquisition of Legacy Molekule pursuant to the Agreement and Plan of Merger dated as of October 3, 2022 by and among the Company, Air King Merger Sub Inc., a Delaware corporation and direct wholly owned subsidiary of the Company (“Merger Sub”), and Legacy Molekule (the “Molekule Merger”). Pursuant to the Merger Agreement, Merger Sub merged with and into Legacy Molekule, with Legacy Molekule continuing as the surviving entity and a wholly owned subsidiary of the Company. In connection with the closing of the Molekule Merger , the Company changed its name from AeroClean Technologies, Inc. to Molekule Group, Inc.

At the effective date of the Molekule Merger, the outstanding shares of Legacy Molekule common stock, par value $0.0001, that were issued and outstanding immediately prior to the effective time of the Molekule Merger (the “Legacy Molekule Common Stock”) (including shares of Legacy Molekule Common Stock resulting from the conversion of Legacy Molekule’s eligible preferred stock, but excluding dissenting shares and shares held in treasury), were converted automatically into, and the holders of such shares of Legacy Molekule Common Stock were entitled to receive, by virtue of the Molekule Merger and upon the terms and subject to the conditions set forth in the merger agreement, 14,907,210 fully paid and nonassessable shares of the Company’s common stock, which resulted in the Legacy Molekule stockholders in the aggregate, after taking into account the 23,608 shares of Company Common Stock underlying In-the-Money Company Warrants (as defined in the merger agreement) and the grants of 500,380 RSUs by the Company to certain continuing Legacy Molekule employees that were deemed vested and outstanding as of immediately following the effective time of the Molekule Merger, holding 49.5% of the Outstanding Shares (as defined in the merger agreement). Immediately following the closing of the Molekule Merger, there were 30,427,750 shares of Company Common Stock outstanding, which does not include Company Common Stock that may be issued upon the vesting of RSUs.

Based on the Company’s preliminary purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $66 million, of which $46 million was allocated to identifiable intangible assets consisting of customer relationships (approximately $3 million), Molekule’s trade name (approximately $27 million), and developed technology (approximately $16 million) and $20 million was allocated to goodwill.

The Molekule Merger was accounted for under FASB ASC 805, Business Combinations (“ASC 805”). The results of operations for Legacy Molekule are included in the accompanying condensed consolidated statements of operations from the date of acquisition. The valuation of certain assets, principally intangible assets including goodwill and identified intangible assets related to the acquisition, inventory and property, plant and equipment, is not yet complete, and as such, the Company has not yet finalized its allocation of the purchase price for the acquisition.

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The following table summarizes the provisional amounts allocated to the estimated fair values of assets acquired and fair values of liabilities assumed in the Legacy Molekule acquisition in accordance with ASC 805:


	Legacy Molekule
Cash and cash equivalents	$	2,988,100
Accounts receivable		378,195
Inventories		31,081,238
Prepaid and other current assets		1,138,784
Property, Plant and Equipment		6,402,425
Goodwill		20,404,413
Intangible assets, net		45,890,000
Right of Use Assets		10,479,883
Other long-term assets		220,779
Accounts payable		(12,094,186)
Accrued expenses		(3,001,862)
Accrued sales tax		(516,530)
Notes payable		(36,576,443)
Operating lease liabilities		(10,480,088)
Deferred tax liabilities		(1,597,682)
Other current and non-current liabilities		(2,250,953)
Total consideration	$	52,466,073

On a pro forma basis to give effect to the Molekule merger as if it occurred on January 1, 2022, revenues, net loss and loss per basic share for the six months ended June 30, 2023 and 2022 would have been as follows:


		June 30, 2023	June 30, 2022
		Pro forma	Pro forma
Revenues	$	22,762,753	25,226,575
Net loss		(36,498,858)	(11,566,624)
Loss per diluted share		(1.17)	(0.83)

4. Financial Instruments Fair Value Measurements

2022 Private Placement Warrants

The 2022 Warrant issued in connection with the 2022 Private Placement (as such terms are defined in Note 13) was accounted for as a liability and accordingly the warrant liability is re-measured at each balance sheet date until its exercise or expiration, and any change in fair value is recognized in the Company’s condensed consolidated statement of operations.

2023 Private Placement Warrants

On May 3, 2023, the Company entered into the Securities Purchase Agreement (“SPA”) with a selling stockholder (the “Selling Stockholder”), pursuant to which the Company agreed to sell (i) 3,400,000 shares of common stock, (ii) 3,125,000 shares of common stock that are issuable upon the exercise of the Series A Warrant, (iii) 6,250,000 shares of common stock that are issuable upon the exercise of the Series B Warrant and (iv) 2,850,000 shares of common stock that are issuable upon the exercise of the Pre-Funded Warrant collectively the “2023 Warrants”), for an aggregate purchase price of approximately $9,971,500 (the “2023 Private Placement”) as such terms defined in Note 13. The SPA contains customary representations, warranties and agreements by the Company. The

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Company also agreed to reduce the exercise price of the 2022 Warrant owned by the Selling Stockholder from $11.00 to $2.00 per share of common stock.

The Company utilizes a Black-Scholes option pricing model to estimate the fair value of the 2022 Warrant, which is considered a Level 3 fair value measurement. The Black-Scholes option-pricing model considers several variables and assumptions in estimating the fair value of financial instruments, including the per-share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility over the expected term, and expected annual dividend yield. Certain inputs utilized in the Company’s Black-Scholes pricing model may fluctuate in future periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the warrant liability, which could also result in material non-cash gain or loss being reported in the accompanying unaudited condensed consolidated statements of operations.

The following table provides the significant inputs to the Black-Scholes pricing model for the fair value of the 2022 Warrant:


	At May 3, 2023			At May 5, 2023			At June 30, 2023
Stock price	$	1.57		$	1.57		$	2.34
Expiration term (in years)		4.39			4.39			4.24
Volatility		98.0	%		98.0	%		96.0	%
Risk-free rate		3.50	%		3.50	%		4.3	%
Dividend yield		0.0	%		0.0	%		0.0	%
Fair Value per Warrant	$	0.61		$	1.07		$	1.71

The following table provides the significant inputs to the Black-Scholes pricing model for the fair value of the Series A Warrant:


	At May 5, 2023			At June 30, 2023
Stock price	$	1.57		$	2.34
Expiration term (in years)		0.67			0.51
Volatility		85.0	%		99.0	%
Risk-free rate		5.00	%		5.5	%
Dividend yield		0.0	%		0.0
Fair Value per Warrant	$	0.43		$	1.01

The following table provides the significant inputs to the Black-Scholes pricing model for the fair value of the Series B Warrant:


	At May 5, 2023			At June 30, 2023
Stock price	$	1.57		$	2.34
Expiration term (in years)		5.00			4.85
Volatility		98.0	%		96.0	%
Risk-free rate		3.40	%		4.2	%
Dividend yield		0.0	%		0.0	%
Fair Value per Warrant	$	1.14		$	1.80

The following table provides the significant inputs to the Black-Scholes pricing model for the fair value of the Pre-Funded Warrant:


	At May 5, 2023			At June 30, 2023
Stock price	$	1.57		$	2.34
Expiration term (in years)		5.00			4.85
Volatility		98.0	%		96.0	%
Risk-free rate		3.40	%		4.2	%
Dividend yield		0.0	%		0.0	%
Fair Value per Warrant	$	1.56		$	2.33

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The private placement offering costs of $673,290 were allocated to the Warrants entirely and were immediately expensed and recorded as selling, general and administrative expense in the statement of operations for the quarter ended June 30, 2023.

The 2023 Warrants issued in connection with the 2023 Private Placement are being accounted for as a liability and accordingly the warrant liability is re-measured at each balance sheet date until its exercise or expiration, and any change in fair value is recognized in the Company’s condensed consolidated statement of operations.

A reconciliation of the 2022 Warrant liability and the 2023 Warrants liability for the three months ended June 30, 2023, as follows:


		2022 Warrant		2023 Warrants
Balance at March 31, 2023	$	1,646,000	$	—
Change in fair value on date of modification		691,000		—
Initial fair value on date of issuance		—		12,956,000
Change in fair value		223,000		8,118,000
Balance at June 30, 2023	$	2,560,000	$	21,074,000

A reconciliation of the 2022 Warrant liability and the 2023 Warrants liability for the six months ended June 30, 2023 as follows:


		2022 Warrant		2023 Warrants
Balance at December 31, 2023	$	3,372,000	$	—
Change in fair value on date of modification		691,000		—
Initial fair value on date of issuance		—		12,956,000
Change in fair value		(1,503,000)		8,118,000
Balance at of June 30, 2023	$	2,560,000	$	21,074,000

The fair value of the 2023 Warrants and the 2022 Warrant aggregated was $23,634,000 at June 30, 2023 and the fair value of the 2022 Warrant was $3,372,000 at December 31, 2022, respectively. The Company recognized a loss in connection with the change in the fair value of warrant liabilities of $12,050,500 and $10,324,500 in the statements of operations for the three months and six months ended June 30, 2023, respectively.

The fair value of the 2023 Warrants at the date of issuance was greater than the gross proceeds, resulting in $3,018,500 being recognized as an expense and par value of $34,000 being recognized for the 3,400,000 of shares of common stock issued.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets of $1,801,533 and $665,395 at June 30, 2023 and December 31, 2022, respectively, consisted primarily of prepaid insurance premiums and amounts paid to suppliers and vendors for inventories and retainers for engineering, product development, testing and other services to be performed.

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6. Inventories

Inventories consisted of the following:


	June 30,		December 31,
	2023		2022
Raw materials	$	4,002,445	$	712,752
Finished goods		15,096,071		1,307,961
Work in process		10,334,364		—
Total inventories	$	29,432,880	$	2,020,713

7. Property and Equipment

Property and equipment consisted of the following:


	Useful Life	June 30,		December 31,
	(Years)	2023		2022
Leasehold improvements	Lesser of useful life or lease term	$	2,748,934	$	847,217
Machinery and tooling	5 - 7		3,780,221		1,270,652
Furniture and equipment	3 - 10		928,208		241,835
Software	2-3		1,390,514		—
Construction in progress			651,857		—
			9,499,734		2,359,704
Less: accumulated depreciation			873,703		240,570
		$	8,626,031	$	2,119,134

Property and equipment are stated at cost and depreciated generally under the straight-line method over their estimated useful lives (or the lesser of the term of the lease for leasehold improvements, as appropriate), except for tooling. Tooling is depreciated utilizing either the units-of-production method or a straight-line method over a life of 5-7 years depending on the type of tooling. As a result of the fair value adjustments made during the three months ended June 30, 2023 the Company made an adjustment to decrease depreciation expense for the six months ended June 30, 2023 resulting in a total of ($274,603) being recognized in the three months ended June 30, 2023 Depreciation expenses was $36,219 for the three months ended June 30, 2023 and 2022, respectively, and $633,133 and $72,047 for the six months ended June 30, 2003 and 2022, respectively.

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8. Goodwill and Intangible Assets

Goodwill

Goodwill was $21,031,064 as of June 30, 2023 compared to $626,647 as of December 31, 2022.

Intangible Assets

Identifiable intangible assets were $45,890,000 and amortization expense associated with identifiable intangible assets was $131,994 and $522,238 for the three and six months and ended June 30, 2023, respectively, and nil for 2022. The Company currently expects to recognize amortization expense related to intangible assets of approximately $1,260,666 in each of the next five fiscal years. The future amortization amounts are estimates.

The following sets forth the intangible assets by major asset class as of June 30, 2023, all of which were acquired through business purchase transactions:


	Useful Life	Original		Accumulated		Net Book
	(Years)	Cost		Amortization		Value
Trademark	Indefinite		26,980,000		—		26,980,000
Internally-developed software	15		15,660,000		487,200		15,172,800
Customer Relationships	15		3,250,000		101,111		3,148,889
			45,890,000		588,311		45,301,689

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


	June 30,		December 31,
	2023		2022
Accrued wages and bonus	$	175,892	$	514,169
Research and development		402,100		47,547
Professional and consulting fees		494,307		16,876
Warranty reserve		385,748		—
Accrued legal fees		2,153,956		439,901
Other accrued liabilities		2,256,736		209,909
Total accrued expenses and other current liabilities	$	5,868,740	$	1,228,402

10. Notes Payable

In connection with the Merger Agreement (Note 3) effective January 12, 2023, the Company became jointly and severally liable for to the existing Senior Term Loan, Mezzanine Term Loan, and the Facility Term Loan with Legacy Molekule.

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Senior Term Loan

In June 2016, Legacy Molekule entered into a Loan and Security Agreement (the “Senior Loan Agreement”), as amended with Silicon Valley Bank, now a division of First Citizens Bank (“SVB”) which provided for borrowings under two term loans (“Senior Term Loan”) aggregating $7.6 million. On May 31, 2023, the Company amended the Senior Term Loan by entering into the Seventh Loan Modification Agreement of its Senior Loan Agreement, which extended the payment term from thirty-six months to fifty-nine months. The loan amendment included a restructuring fee of $200,000. As of June 30, 2023, the outstanding principal balance under the Senior Term Loan was $4.3 million. The Senior Term Loan bears interest at an annual rate equal to the greater of the Prime Rate plus 1% or 4.25%. As of June 30, 2023, the interest rate was 9.25% per year. The maturity date for the Senior Term Loan is March 1, 2028. Interest is payable monthly in arrears. The principal is repayable in 59 equal monthly installments beginning on May 12, 2023. The Senior Loan Agreement contains customary representations and warranties, affirmative and negative covenants (including financial covenants), events of default and termination provisions. Additionally, $380,000 of debt issuance cost (related to the 2022 modification) is being amortized over the term of the loan.

Mezzanine Term Loan

In March 2021, Legacy Molekule entered into a Mezzanine Loan and Security Agreement (“Mezzanine Loan Agreement”), as amended, with SVB, consisting of a Mezzanine Term Loan A of $15 million and a Mezzanine Term Loan B of $15 million. On May 31, 2023, the Company amended the Mezzanine Term Loan by entering into a Fourth Loan Modification Agreement (“Fourth LMA”) to the Mezzanine Loan Agreement, which combined both Mezzanine Term Loan A, the principal payments for which were to begin on April 1, 2024 and Mezzanine Term Loan B, the principal payments for which were to begin on April 1, 2025, into one Mezzanine Term Loan, with principal payments beginning April 1, 2025. The loan amendment included a restructuring fee of $300,000. As of June 30, 2023, the outstanding principal balance under the Mezzanine Term Loan was $30 million. The Mezzanine Term Loan bears interest at a floating rate per annum equal to the greater of (x) the Prime Rate plus 6.00% or (y) 9.25%. As of June 30, 2023, the interest rate was 14.25% per year. The Mezzanine Term Loan matures on March 1, 2028. Interest is payable monthly in arrears. The principal of the Mezzanine Term Loan is repayable in 36 equal monthly installments beginning on April 1, 2025. The Mezzanine Loan Agreement contains customary representations and warranties, affirmative and negative covenants (including financial covenants), events of default and termination provisions.

Both the Senior Loan Agreement and Mezzanine Loan Agreement require the Company to maintain a minimum cash balance of $2.0 million. In connection with the amendment in May 2023, the annual revenue target of $50.0 million was amended from the calendar year ending December 31, 2023 to the calendar year ending March 31, 2024. Revenue targets for periods occurring after March 31, 2024 shall be mutually agreed by the Company and SVB. The Company is also required to maintain its primary operating and other deposit accounts and securities accounts with SVB and its affiliates.

Facility Term Loan

In June 2020, Legacy Molekule entered into a Facility Term Debt Agreement (the “Facility Term Loan”) with Trinity Capital, Inc. (“Trinity”) in order to obtain financing related to funding the build out of the Company’s filter manufacturing plant. The Company became a co-borrower under this agreement upon the closing of the Molekule Merger. Legacy Molekule drew down $2.9 million in June 2020, $0.6 million in September 2020, $0.9 million in December 2020 and $0.5 million in August 2021. Principal and interest are paid monthly with the principal being repaid in equal monthly installments from the month after the amount was drawn until April 1, 2026, with the last two months’ payments having been made at the inception of each loan. At the end of the term, Trinity also requires the Company to pay down an additional 10% of the total term draw down amount, which results in an additional payment of $0.4 million in total for all the draws. This additional payment is being accreted to the total outstanding amount over the term of the Facility Term Loan and resulted in an incremental $0.3 million of long-term debt to Trinity as of June 30, 2023. As of June 30, 2023, the outstanding principal balance under the Facility Term Loan was $2.4 million. The Facility Term Loan contains customary representations and warranties, affirmative and negative covenants and events of default.

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Notes payable consisted of the following:


	June 30,		December 31,
	2023		2022
Senior term loan	$	4,860,367	$	—
Facility term loan		2,202,167		—
Mezzanine term loan		30,300,000		—
		37,362,534		—
Less: Unamortized debt issuance fees		1,195,342		—
Less: current portion		2,112,710		—
Total long-term notes payable	$	34,054,483	$	—

11. Commitments and Contingencies

Lease Commitments – On February 1, 2021, the Company entered into a lease with Gardens Bio Science Partners, LLC, an entity controlled by the Company’s co-founder and Chairman of the Company’s Board of Directors (the “Board”). The leased premises consist of 20,000 square feet of office and warehouse space. The lease expires in February 2031. The annual base rent of $260,000 is subject to escalation of 2.5% on an annual basis. Rent expense under this lease was $118,549 and $244,602 for the three and six months ended June 30, 2023, respectively. As of June 30, 2023, the future minimum lease payments under this arrangement approximated $2,295,325.

In February 2019, Legacy Molekule entered into a lease agreement for office space in San Francisco, California. The leased premises consist of 38,000 square feet of office space. The lease expires in August 2026. The lease calls for monthly base rental payments of $209,231 commencing in the first month and fixed annual base rental increases of 3%. Rent expense is accounted for on a straight-line basis. Rent expense under this lease was $691,753 and $1,286,468 for the three and six months ended June 30, 2023, respectively. The lease expires in August 2026. Since June 2023, the lessor has been drawing under an existing letter of credit, which was put in place as security for payment of the monthly base rental payments. Amounts available under such letter of credit will be fully utilized by September, 2023 after which the Company will be required to pay its monthly base rental payments to the lessor. The Company is currently in discussions with the lessor to renegotiate the terms of the lease. There is no assurance that any such renegotiation will be successful.

The Company leases office, warehouse and lab space under noncancelable leases with various expiration dates through 2026. Rent expense under these leases was $161,529 and $295,799 for the three and six months ended June 30, 2023, respectively. As of June 30, 2023, the future minimum lease payments under this arrangement approximated $10,817,986.

Legal Proceedings

From time to time, the Company is subject to legal proceedings in the normal course of operating its business. The outcome of litigation, regardless of the merits, is inherently uncertain. In August 2022, the Company received notice of a complaint filed in the U.S. District Court for the Southern District of New York (the “Court”) by Sterilumen, Inc. (“Sterilumen”), a wholly-owned subsidiary of Applied UV, Inc., in connection with the marketing and sale of the Company’s patented air purification products. In the complaint, the plaintiff alleged trademark infringement, violation of fair competition practices and damages to Sterilumen. On March 13, 2023, the Court dismissed Sterilumen’s claims with prejudice and ruled that the Company’s counterclaims remained extant. The Company subsequently agreed with Sterilumen that Sterilumen will not challenge the Court’s dismissal and will not bring any future claim against the Company alleging infringement from the use of SteriDuct or AeroClean and that the Company will file a notice to dismiss its counterclaims without prejudice. The Company did not establish a contingency reserve related to this matter.

In November 2020, Legacy Molekule was named as the defendant in a class-action complaint in which the plaintiffs alleged that Legacy Molekule misrepresented the capabilities of its products. Legacy Molekule denied all allegations made by the plaintiffs. Without admitting any liability and solely for the purpose of eliminating the uncertainties and expenses of further protracted litigation, Legacy Molekule entered into a class-wide settlement of this matter, where the class was defined to include purchasers who bought Molekule

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devices from third-party retailers (e.g. Amazon, Best Buy). The settlement required dismissal of all remaining class-action claims against Legacy Molekule. The Court approved this settlement and entered judgment in the matter on January 25, 2022. The settlement is currently being administered with the cash settlement payment of $1,300,000 made in March 2022. The Company accrued a loss liability related to the matter of $1,400,000 as of June 30, 2023 and nil as of December 31, 2022.

The Company enters into agreements with its customers, business partners and other parties in the ordinary course of business that include provisions for the indemnification, holding harmless and defense of indemnified parties of varying scope and terms with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of third-party IP infringement claims. In these circumstances, payment by the Company may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. In addition, the Company has indemnification agreements with its directors and executive officers. As of June 30, 2023, the Company had no other accrued liabilities related to other legal matters.

Indemnities, Commitments and Guarantees – Effective November 1, 2020, the Company executed employment agreements with two key members of management that will continue until terminated by either party. In the event of termination without cause, the Company is obligated to pay the executive their base salary for a period of six months. Further, in the event of termination without cause or resignation for good reason, or a change of control, each as defined in the agreements, within twelve months of such termination or resignation, each of the executives is entitled to accelerated vesting of any outstanding time-based equity awards. The employment agreements provide for a base salary and a discretionary annual bonus to be determined at the sole discretion of the Company’s Board of Managers, for periods prior to the Company’s incorporation in the State of Delaware (the “Corporate Conversion”) when it was a limited liability company, and the Company’s Board of Directors (in either case, the “Board”), for periods following the Corporate Conversion. The Company’s employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance under certain circumstances in the event of a change of control. On May 1, 2021, the employment agreements were amended to provide for the eligibility of each executive to receive restricted stock units upon the conversion of the Company to a Delaware corporation. Accordingly, the executives were granted an aggregate of 443,269 restricted stock units contemporaneously with the Public Offering. The Company also had agreements in place with independent contractors whereby the Company was required to compensate the independent contractors fifty percent in cash and fifty percent in equity. The equity consideration was contingent upon future events, including the conversion to a Delaware corporation and a new round of equity financing from third-party sources. On October 3, 2022, the employment agreements were amended in connection with the merger with Legacy Molekule and the executives were granted an aggregate of 732,090 of additional restricted stock units.

Guaranteed Payment – Effective August 10, 2022, Legacy Molekule entered into a Sales Agency Agreement (the “Agency Agreement”) with a company to develop a market for its products in the United States for a period of one year with mutual options to renew annually for up to a term of five years. The Agency Agreement provides for payments on a monthly basis to the agent of an amount equal to the greater of the commissions earned and a guaranteed minimum ranging from $502,500 to $667,500.

Registration Rights Agreement – In connection with the Company’s initial public offering (the “Public Offering”) the Company entered into a registration rights agreement with the Chairman of its Board and each of its other stockholders that held 10% or more of its outstanding common stock immediately upon completion of the Public Offering. On January 12, 2023, this registration rights agreement was amended and restated in connection with the Molekule Merger by and among the Company and certain stockholders of AeroClean Technologies, Inc. and Legacy Molekule (the “Registration Rights Agreement”). The Registration Rights Agreement provides the stockholders party thereto with certain “demand” and customary “piggyback” registration rights. The Registration Rights Agreement provides that the Company will pay certain expenses relating to such registrations and indemnify the registration rights holders against certain liabilities that may arise under the Securities Act of 1933, as amended.

12. Related Party Transactions

On February 26, 2023, the Company entered into an Agreement and Plan of Merger with Aura Smart Air Ltd. (“Aura”), an Israeli company listed on the Tel Aviv Stock Exchange (see Note 16 for more information). In connection with the transaction, the Company also entered into a Technology Collaboration Agreement and a Co-Distribution Agreement. Under the Technology Collaboration Agreement the Company paid $250,000 to Aura for a perpetual license to Aura’s Background Intellectual Property and other Intellectual Property owned or controlled by Aura for use in, amongst other items, selling Molekule products and services. Additionally, the Company paid $68,182 under the Technology Collaboration Agreement, the monthly payment amount due to Aura, for services as part of the Company’s collaboration with Aura on the statement of work specified in the agreement. The objectives of the statement of work include onboarding Company devices onto the Aura platform, sending and receiving data to the platform and implementing various internet of things and other Aura technologies into the Company’s devices and software.

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13. Stockholders’ Equity

Long-term Incentive Plan

In conjunction with its IPO, on November 23, 2021, the Company adopted the Employee Stock Purchase Plan, the 2021 Incentive Award Plan (the “Long-Term Incentive Plan” or the “LTIP”) and the Non-Employee Directors Stock and Deferred Compensation Plan (collectively, the “Plans”) and has reserved 2,802,273 shares, collectively, for issuance or sale under the Plans. The Board approved an amendment to the LTIP to increase the shares authorized to be issued by 1,500,000, and the evergreen set forth in the LTIP resulted in an increase of 277,552 shares.

The Company’s Compensation Committee has the authority under the LTIP to grant stock options; stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other forms of equity-based or equity-related awards. Compensation cost is generally recorded on a straight-line basis over the vesting term of the shares based on the grant date value using the closing trading price.

Stock-based compensation expenses were $1,502,724 and $708,540 for the three months ended June 30, 2023 and 2022, respectively, and $3,404,431 and $1,379,378 for the six months ended June 30, 2023 and 2022, respectively. During the three months ended June 30, 2023, the Company granted 500,000 restricted stock units to members of management and none to members of the Board under the LTIP. During the six months ended June 30, 2023, the Company granted 1,232,090 restricted stock units to members of management and 742,000 restricted stock units to members of the Board under the LTIP. The total number of restricted stock units issued at June 30, 2023 was 3,425,537.

Unrecognized compensation expense related to restricted stock awards made by the Company was $10,957,851 at June 30, 2023. As of June 30, 2023, the Company had