# Serve Robotics Inc. /DE/ (SERV) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Serve Robotics Inc. /DE/'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1832483/000121390024018566/ea0200355-10k_serverobot.htm
Accession: 0001213900-24-018566
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SERV/
All MD&A years: /company/SERV/mda/
Previous year: /company/SERV/mda/fy2022/ (FY 2022)
Next year: /company/SERV/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation

The following discussion of the financial condition
and results of operations of the Company should be read in conjunction with the financial statements and the notes to those statements
included in this Annual Report on Form 10-K for the period ended December 31, 2023. Some of the information contained in this discussion
and analysis including information with respect to our plans and strategy for our business, includes forward-looking statements that involve
risk, uncertainties and assumptions. You should read Part I, Item 1A. Risk Factors of this report for a discussion of important factors
that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained
in the following discussion and analysis.

Note about Forward-Looking Statements

This Annual Report on Form 10-K includes statements
that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,”
“believes,” “projects,” “intends,” “plans,” “expects,” or “anticipates,”
and do not reflect historical facts.

Specific forward-looking statements contained
in this portion of the report include, but are not limited to: (i) statements that are based on current projections and expectations about
the markets in which we operate, (ii) statements about current projections and expectations of general economic conditions, (iii) statements
about specific industry projections and expectations of economic activity, (iv) statements relating to our future operations, prospects,
results, and performance, and (v) statements that the cash on hand and additional cash generated from operations together with potential
sources of cash through issuance of debt or equity will provide the Company with sufficient liquidity for the next 12 months.

Forward-looking statements involve risks, uncertainties,
and other factors, which may cause our actual results, performance, or achievements to be materially different from those expressed or
implied by such forward-looking statements. Factors and risks that could affect our results, future performance and capital requirements
and cause them to materially differ from those contained in the forward-looking statements include those identified in the “Cautionary
Note Regarding Forward-Looking Statements” and the Part 1, Item 1A. Risk Factors in this report, as well as other factors
that we are currently unable to identify or quantify, but that may exist in the future.

In addition, the foregoing factors may generally
affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements
were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained
on our website www.serverobotics.com or any other websites referenced in this report are not part of this report.

Our Company

We are an operating company which has experienced
losses since our inception. Our sources of cash to date have been capital invested by shareholders and venture capital investors/lenders.

The following discussion contains forward-looking
statements, as discussed above. Please see the sections entitled “Cautionary Note Regarding Forward-Looking Statements”
and Part I, Item 1A. Risk Factors in this report for a discussion of the uncertainties, risks and assumptions associated with these
forward-looking statements.

Our principal offices are located at 730 Broadway,
Redwood City, CA 94063, our telephone number is (818) 860-1352 and our corporate website (which does not form part of this report) is
located at www.serverobotics.com.

Overview

On July 31, 2023, Patricia Acquisition Corp.,
Acquisition Sub, and Serve entered into a Merger Agreement. Pursuant to the terms of the Merger Agreement, on the Closing Date, Acquisition
Sub merged with and into Serve, with Serve continuing as the surviving corporation and our wholly owned subsidiary. As a result of the
Merger, we acquired the business of Serve and will continue the existing business operations of Serve as a public reporting company under
the name Serve Robotics Inc. On the Closing Date, Serve’s predecessor was renamed Serve Operating Co.

50

The Merger was treated as a recapitalization and
reverse acquisition for us for financial reporting purposes, and Serve is considered the acquirer for accounting purposes. As a result
of the Merger and the change in our business and operations, a discussion of the past financial results of Patricia Acquisition Corp.
is not pertinent, and under applicable accounting principles, the historical financial results of Serve, the accounting acquirer, prior
to the Merger are considered our historical financial results.

Our discussion and analysis are organized as follows:

[[GREPCENT_TABLE]]
[["","\u25cf","Executive Summary \u2013 Summary analysis of financial and other highlights to provide context for the discussion and analysis."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Results of Operations \u2013 An analysis of our financial results."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Liquidity, and Capital Resources \u2013 An analysis of changes in our balance sheets and cash flows and a discussion of our financial condition and potential sources of liquidity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Critical Accounting Estimates \u2013 Accounting estimates that management believes are the most important to understanding the assumptions and judgments incorporated in our financial results and forecasts and involve a significant level of estimation uncertainty."]]
[[/GREPCENT_TABLE]]

Serve Robotics

Serve is shaping the future of sustainable, self-driving
delivery. We design, develop, and operate low-emissions robots that serve people in public spaces, starting with food delivery. Starting
in 2017, our core technology was developed by our co-founders and a majority of our product and engineering team in San Francisco, California
as a special project within Postmates, one of the pioneering food delivery startups in the United States. By the end of 2020, the
team had developed a fleet of sidewalk robots that had successfully performed over 10,000 commercial deliveries for Postmates in
California, augmenting Postmates’ fleet of human couriers. Postmates was acquired by Uber in 2020, and in February of 2021, Uber’s
leadership team agreed to contribute the intellectual property developed by the team and assets relating to this project to Serve. In
return for this contribution and an investment of cash into the Company, Uber acquired a minority equity interest in the business. By
the end of the first quarter of 2021, the majority of the team that had worked on this project at Postmates joined Serve as full time
employees.

Because we started this project within a food
delivery company, our team comes with a depth of combined expertise in food delivery, automation, and robotics. Our expertise positions
us to service the growing on-demand delivery market, including food delivery, where approximately half of all deliveries are less than
2.5 miles and well-suited to delivery by sidewalk robots. We provide a robotic delivery experience that delights customers, improves
reliability for merchants, and reduces traffic congestion and eliminates vehicle emissions. At scale, our delivery robots can complete
deliveries at lower cost than human couriers, making on-demand delivery more affordable and accessible in areas we operate.

Recent Developments

License and Services Agreement

On February 20, 2024, Serve entered into a License
and Services Agreement (the “LSA”) with Magna as a part of a strategic partnership with Magna. Pursuant to the LSA, Serve,
as an independent contractor of Magna, agreed to (i) grant a non-exclusive license to the Serve AMR Technology in the Licensed Fields
of Use (each as defined in the LSA) to Magna and its affiliates and (ii) provide all reasonable engineering, technical and related support
services that Magna may request from time to time in writing and in furtherance of commercialization of the Serve AMR Technology and products
(including software) using, practicing, or incorporating the Serve AMR Technology, and manufactured using, practicing or incorporating
the Serve AMR Technology (such services and support, the “Development Services”). Except as expressly set forth in the LSA,
any Development Services shall be provided under the MSA (as defined below) and, if expired or terminated, under terms and conditions
that are consistent with the terms therein. The term of the LSA will continue unless terminated by either party pursuant to and in accordance
with the terms and conditions set forth in the LSA.

Master Services Agreement

On February 1, 2024, Serve entered into a Master
Services Agreement (the “MSA”) with Magna, retroactively effective as of January 15, 2024 (the “Effective Date”).
Pursuant to the MSA, Serve agreed to provide certain services to Magna as described in one or more statements of work (“SOWs”).
Such SOWs will contain a description of the scope, the time to be spent on performance, the fees to be paid to Serve, the functional requirements
and technical specifications and, to the extent applicable, the timetable, schedule or milestones for the performance of the requested
services. Serve and Magna entered into the first SOW on the Effective Date. The term of the MSA commenced on the Effective Date and will
continue for a term of three months, unless terminated earlier or mutually extended in accordance with its terms.

In connection with the strategic partnership with
Magna, on February 7, 2024, we issued the Magna Warrant to purchase up to 2,145,000 shares of our common stock, subject to adjustments
as provided therein, at an exercise price of $0.01 per share.

The Magna Warrant will be exercisable in two equal
tranches: (i) the first tranche will become exercisable no later than May 15, 2024, subject to certain conditions; and (ii) the second
tranche will become exercisable upon Magna’s achievement of a certain manufacturing milestone as set forth in a production and purchase
agreement to be entered into with respect to the contract manufacturing of our autonomous delivery robots by Magna or its affiliates.
Notwithstanding the foregoing, the Magna Warrant Shares will vest and become exercisable upon any “change of control” (as
defined in the Magna Warrant).

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The Magna Warrant Shares that may be issued pursuant to the exercise
of the Magna Warrant were offered and sold in a transaction exempt from registration under the Securities Act in reliance on Section 4(a)(2)
of the Securities Act.

Convertible Promissory Notes Offering

At an initial closing on January 2, 2024 and subsequent closings
on January 12, 2024, January 22, 2024 and January 26, 2024, we issued to certain accredited investors convertible promissory notes, for
which the Company received an aggregate of $5.0 million in proceeds. The convertible promissory notes bear interest at a rate of 6.00%
per year, compounded annually, due and payable upon request by each investor on or after the 12-month anniversary of the original issuance
date of each note. The Company may not prepay or repay the notes in cash without the consent of the investors.

Note Payable – Related Party

On December 27, 2023, Serve issued a senior
secured promissory note to its Chief Executive Officer for which Serve received $70,000 in proceeds. The note bore interest at 7.67% per
annum. The agreement contained a clause that the terms would be updated if subsequent notes were issued at a more favorable term. Serve
repaid the note on January 3, 2024.

Merger Agreement

On July 31, 2023, the Company, our wholly-owned
subsidiary, Serve Acquisition Co., a corporation formed in the State of Delaware on July 10, 2023 (“Acquisition Sub”), and
Serve entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the terms of the
Merger Agreement, on July 31, 2023 (the “Closing Date”), Acquisition Sub merged with and into Serve, with Serve continuing
as the surviving corporation and our wholly-owned subsidiary (the “Merger”).

As a result of the Merger, we acquired the business
of Serve, a leading autonomous sidewalk delivery company based in Redwood City, California. See Part I, Item 1. Business of this
report. At the time the certificate of merger reflecting the Merger was filed with the Secretary of State of Delaware (the “Effective
Time”), each of Serve’s shares of capital stock issued and outstanding immediately prior to the closing of the Merger was
converted into the right to receive 0.8035 of a share of our common stock (in the case of shares held by accredited investors), with the
maximum number of shares of our common stock issuable to the former holders of Serve’s capital stock equal to 20,948,917 shares
after adjustments due to rounding for fractional shares. Immediately prior to the Effective Time, an aggregate of 3,500,000 shares
of our common stock owned by our stockholders prior to the Merger were forfeited and canceled (the “Stock Forfeiture”).

In addition, pursuant to the Merger Agreement,
(i) options to purchase 1,984,951 shares of Serve’s common stock issued and outstanding immediately prior to the closing
of the Merger under the Serve Plan were assumed and converted into options to purchase 1,594,800 shares of our common stock, (ii) warrants
to purchase 160,323 shares of Serve’s Series Seed preferred stock issued and outstanding immediately prior to the closing of
the Merger were assumed and converted into warrants to purchase 128,819 shares of our common stock, and (iii) warrants to purchase
17,314 shares of Serve’s common stock issued and outstanding immediately prior to the closing of the Merger were assumed and
converted into warrants to purchase 13,911 shares of our common stock and (iv) SAFEs totaling $15,551,953 were converted into
4,372,613 shares of our common stock.

Private Placement

Following the Effective Time of the Merger, we
sold 3,183,671 shares of our common stock pursuant to a private placement offering in multiple closings (the “Private Placement”).
We also issued 937,961 shares of our common stock to convert the outstanding principal and interest of outstanding Bridge Notes in
connection with the consummation of the Merger.

Each investor in the Private Placement was required
to represent that, at the time of the applicable closing, it (i) has a substantive, pre-existing relationship with us, or has direct
contact with us or the Placement Agents or other enumerated parties outside of the Private Placement and (ii) did not independently
contact us as a result of general solicitation by means of this report, any press release or any other public disclosure disclosing the
material terms of the Private Placement.

Note Payable – Related Party

In June and July 2023, the Company issued
a senior secured promissory note with its Chief Executive Officer for which the Company received $449,000 in proceeds. The note bore interest
at 7.67% per annum and matured upon the Merger. The agreement contained a clause that the terms would be updated if subsequent notes were
issued at a more favorable term. Accordingly, based on loans in July 2023, notes were issued that contained a 16% exit fee. Serve
repaid the notes upon the closing of the Merger.

Secured Subordinated Promissory Notes

On July 6, 2023, Serve issued Secured Subordinated
Promissory Notes (the “Promissory Notes”) to accredited investors in an aggregate principal loan amount of $750,000. Pursuant
to the Promissory Notes, the loans accrued interest on the unpaid principal amount at a rate of 18.00% per annum, computed as simple interest.
Each holder of the Promissory Notes was entitled to an exit fee equal to 16% of the stated principal amount of such holder’s Promissory
Note, less the total amount of interest that accrued on such Promissory Note prior to the closing of the Merger (the “Exit Fee”).
Serve repaid the Promissory Notes and the Exit Fee upon the closing of the Merger.

52

Outlook And Challenges Facing Our Business

There are a number of industry factors that affect
our business which include, among others:

Overall Demand for Last-mile Delivery on Partner
Platforms.

Our potential for growth depends significantly
on continued demand for last-mile delivery of food and other items on our partner platforms. This demand can fluctuate based on various
market cycles and weather and local community health conditions, as well as evolving competitive dynamics. Our largest stream of projected
revenue comes from maximizing utilization of our robots to perform deliveries on our partner platforms. Matching algorithms on these platforms
as well as the extent of their merchant and end-customer participation in robotic delivery directly impacts the utilization rate of our
robots, both of which can be challenging to predict. These uncertainties make demand difficult to forecast for us and our partners.

Customer Concentration.

We currently have a limited number of customers.
Sales to Uber represented 71% of our revenues for the year ended December 31, 2023, and if Uber were to breach, cancel, or amend
our agreement, it may have an outsized effect on our revenue, cash on hand, and profitability. Our business development team is actively
pursuing new delivery and branding customers to diversify our customer base.

Inflation and Market Considerations; Availability
of Materials, Labor & Services.

We consider most on-demand purchases as discretionary
spending for consumers, and we are therefore susceptible to changes in discretionary spending patterns and economic slowdowns in the geographic
areas in which merchants on our partners’ platforms operate and in the economy at large. Discretionary consumer spending can be
impacted by general economic conditions, unemployment, consumer debt, inflation, rising gasoline prices, interest rates, consumer confidence,
and other macroeconomic factors. Inflation can lead to increased cost of material and labor for restaurants and merchants who may in turn
raise prices on the item they sell and result in a reduction in demand for those items. To the extent inflation reduces economic activity
and consumer demand for items we deliver, it could negatively impact our financial results. Continued uncertainty in or a worsening of
the economy, generally or in a number of our markets, and consumers’ reactions to these trends could adversely affect our business
and cause us to, among other things, reduce the number and frequency of new market openings or cease operations in existing markets. It
is important to note, however, that inflation can also serve as a tailwind that would accelerate the adoption of automated robotic last-mile
delivery as labor becomes more expensive and drives up the cost of delivery by humans.

Intellectual Property.

We rely on patented and non-patented proprietary
information relating to product development, manufacturing capabilities, and other core competencies of our business. Protection of intellectual
property is critical. Therefore, steps such as additional patent applications, confidentiality, and non-disclosure agreements, as well
as other security measures are important. While we believe we have a strong patent portfolio and there is no actual or, to our knowledge,
threatened litigation against us for patent-related matters, litigation or threatened litigation is a common method to effectively enforce
or protect intellectual property rights. Such action may be initiated by or against us and would require significant management time and
expenses.

Supply Chain Constraints.

The global supply shortage of electrical components,
including semiconductor chips and other hardware components essential to the manufacturing and maintenance of our robots, continued to
impact our supply chain throughout 2023. As a result, we experienced increases in our lead times and costs for certain components to build
our robots. Although our supply chain normalized during 2023, we cannot be sure whether global supply chain shortages will impact our
future robot build plans. In order to mitigate supply chain risks, we would need to incur higher costs to secure available inventory and
place non-cancellable purchase commitments with our suppliers, which could introduce inventory risk if our forecasts and assumptions prove
inaccurate. Higher costs of components would impact our cash runway and delays in the manufacturing of our robots would push out our revenue
forecasts.

Governmental and Regulatory Conditions.

Our potential for growth depends on continued
permission and acceptance by local governments and municipalities where our robots perform deliveries. Changes in regulations such as
the imposition of a cap on the number of robots or technical requirements such as robot size and weight restrictions or limitations on
autonomy within a certain geographic area could reduce or limit our ability to generate revenues and/or impact our unit economics in those
markets.

Future Prospects.

We anticipate that we will continue to experience
operating losses in 2023 and 2024 as we seek to implement our long-term strategic plan, using the net proceeds from the Private Placement
to accelerate our development through increased research and development spending, scale our robotic fleet, expand our sales and business
development efforts, and increase our overall headcount in order to achieve efficiencies through scaled growth. Our goal over the next
two years is to scale our operating fleet by a factor of 10 and expand our geographic coverage to new markets beyond our current operating
area in Los Angeles. With such an increase, we anticipate proportional increases in capital costs, overhead, and operating expenses.
We aim to initially achieve profitability in 2025, with increased profitability thereafter; however, doing so is dependent upon numerous
factors, including the development of revenues, general business and economic conditions, and other risks and uncertainties, including
those listed under Part 1, Item 1A. Risk Factors.

53

Components of Results of Operations

Revenue

Our revenue currently consists primarily of (1) delivery
revenues and (2) revenues from branding.

Operating Expenses

Cost of revenue. Cost of revenue consists
primarily of allocations of depreciation on robot assets used for revenue-producing activities, personnel time related to revenue-producing
activities, and costs related to data, software and similar costs that allow the robots to function as intended and for the Company to
communicate with the robots while in service.

Operations. Operations expenses primarily
consist of costs for field operations personnel.

Research and Development. Costs incurred
in the research and development of the Company’s products are expensed as incurred. Research and development costs include product
design, hardware and software costs.

Sales and Marketing. Sales and marketing
expenses include personnel costs and public relations expenses. Advertising costs are expensed as incurred and included in sales and marketing
expenses.

General and Administrative. General and
administrative expenses primarily consist of personnel-related expenses for executive management and administrative functions, including
finance and accounting, legal, and human resources, as well as general corporate expenses and general insurance. General and administrative
expenses also include depreciation on property and equipment as well as amortization of right of use assets. These costs are expensed
as incurred.

Interest Expense

Interest expense consists of stated rates of interest
on financing instruments, fees incurred related to financing instruments or accretion of debt discounts.

Changes in Fair Value of future equity obligations

Changes in the fair value of the simple agreements
for future equity (“SAFEs”) relate to updated assumptions and estimates are recognized within the statements of operations.

Other Income, Net

Other income, net of other expenses, consists
primarily of income generated from our interest-bearing deposit account.

Financial Overview

For the year ended December 31, 2023 and 2022,
we generated revenues of $0.21 million and $0.11 million, respectively, and reported net loss of $24.81 million and $21.86 million,
respectively.

As noted in our consolidated financial statements,
as of December 31, 2023, we had an accumulated deficit of $68.33 million.

54

Results of Operations

Comparison of Results of Operations for the
Year ended December 31, 2023 and 2022

The following table summarizes our operating results
as reflected in our unaudited statements of operations during the year ended December 31, 2023 and 2022, respectively, and provides information
regarding the dollar and percentage increase (or decrease) during such periods.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","Change"],["Revenues","","$","207,545","","","$","107,819","","","$","99,726"],["Cost of revenues","","","1,730,262","","","","1,148,426","","","","581,836"],["Gross loss","","","(1,522,717",")","","","(1,040,607",")","","","(482,110",")"],["Operating expenses:"],["General and administrative","","","4,618,499","","","","3,786,124","","","","832,375"],["Operations","","","2,564,930","","","","2,035,063","","","","529,867"],["Research and development","","","9,947,258","","","","13,565,765","","","","(3,618,507",")"],["Sales and marketing","","","605,205","","","","525,494","","","","79,711"],["Impairment of long-lived assets","","","1,468,995","","","","-","","","","1,468,995"],["Total operating expenses","","","19,204,887","","","","19,912,446","","","","(707,559",")"],["Loss from operations","","","(20,727,604",")","","","(20,953,053",")","","","225,449"],["Other income (expense), net:"],["Interest expense, net","","","(2,264,426",")","","","(636,330",")","","","(1,628,096",")"],["Change in fair value of derivative liability","","","(149,000",")","","","-","","","","(149,000",")"],["Change in fair value of simple agreements for future equity","","","(1,672,706",")","","","(265,744",")","","","(1,406,962",")"],["Total other income (expense), net","","","(4,086,132",")","","","(902,074",")","","","(3,184,058",")"],["Provision for income taxes","","","-","","","","-","","","","-"],["Net loss","","$","(24,813,736",")","","$","(21,855,127",")","","$","(2,958,609",")"],["Weighted average common shares outstanding - basic and diluted","","","14,204,078","","","","6,896,769"],["Net loss per common share - basic and diluted","","$","(1.75",")","","$","(3.17",")"]]
[[/GREPCENT_TABLE]]

Revenues were $0.21 million for the year ended
December 31, 2023, compared with $0.11 million for the year ended December 31, 2022. The increase was because 2023 had a full year of
operations, whereas 2022 had partial year, which resulted in more delivery fees.

Cost of revenues was $1.73 million for the year
ended December 31, 2023, compared with $1.15 million for the year ended December 31, 2022. The increase was because 2023 had a full year
of operations, whereas 2022 had partial year, which resulted in more costs.

General and administrative expense increased $0.83
million to $4.62 million for the year ended December 31, 2023 from $3.79 million for the year ended December 31, 2022, due primarily to
an increase in costs related to administrative functions, including finance and accounting, legal, and human resources, as well as general
corporate expenses.

Operations expense increased $0.53 million to
$2.56 million for the year ended December 31, 2023, compared with $2.04 million for the year ended December 31, 2022, due primarily to
servicing the larger scale of the robot fleet.

Research and development expense, which represented
51.8% and 68.1% of total operating expenses for the years ended December 31, 2023 and 2022, respectively, decreased $3.62 million to $9.95
million for the year ended December 31, 2023 from $13.57 million for the year ended December 31, 2022, due primarily to a reduction in
workforce effective December 2022.

55

Sales and marketing expenses increased $0.08 million
to $0.61 million for the year ended December 31, 2023 from $0.53 million for the year ended December 31, 2022, due primarily to an increase
in personnel costs and public relations expenses.

For the year ended December 31, 2023 an impairment
of long-lived asset expense of $1.47 million was recognized. Based on evaluating the forecasted cash flows through the assets' remaining
useful life, and technology becoming obsolete once a new generation of robots is expected to launch, in 2024, management concluded to
record a full impairment of the assets. Due to the discounted cash flows being negative through the remaining useful life (November 2024)
and the technology becoming obsolete once a new generation of robots is launched, it was determined that there was an impairment and the
expense recognized.

Operating expense decreased $0.71 million to $19.20
million for the year ended December 31, 2023 from $19.91 million for the year ended December 31, 2022, due primarily to a reduction in
workforce effective December 2022.

Interest expense increased $1.63 million to $2.26
million for the year ended December 31, 2023 compared to $0.64 million for the year ended December 31, 2022. This increase is related
to the accretion of debt discounts which is a result of debts entered into that contained redemption features requiring derivative accounting
and warrants issued with debt that discounted the debts. The majority of the increase is due to accretion and to a lesser extent, the
interest on the Farnam Lease.

The change in fair value of future equity obligations
increased by $1.41 million to $1.67 million for the year ended December 31, 2023 compared to $0.27 million for the year ended December
31, 2022 primarily due to the revaluation of SAFEs immediately prior to conversion into common stock.

The change in fair value of derivative liability
increased by $0.15 million to $0.15 million for the year ended December 31, 2023 compared to $0.00 million for the year ended December
31, 2022 primarily due to the revaluation of derivative immediately prior to conversion into common stock, and there was no such derivative
in the prior year.

Other expenses were $4.09 million and $0.9 million
for each of the years ended December 31, 2023 and 2022, respectively primarily due to the increases in interest expense described above.

Net loss increased $2.96 million to $24.81 million
for the year ended December 31, 2023 from $21.86 million for the same period in 2022. The increase in net loss was primarily attributed
to other expenses such as conversion of SAFEs and derivative liability into common stock as well as the impairment on the robot asset
in 2023.

Key metrics

We regularly review the following key business
metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make
strategic decisions:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["","","(Unaudited)","","","(Unaudited)"],["Key Metrics"],["Daily Active Robots","","","34","","","","28"],["Daily Supply Hours","","","260","","","","211"]]
[[/GREPCENT_TABLE]]

Daily Active Robots: We define daily active
robots as the average number of robots performing daily deliveries during the period. Daily active robots reflect our operation team’s
capacity to have active robots in the field performing deliveries and/or generating branding revenues. We closely monitor and strive to
increase our daily active robots efficiently as we improve our autonomy and resultant human-to-robot ratios and increase the number of
merchants and brand advertisers on our platform.

Daily Supply Hours: We define daily supply
hours as the average number of hours our robots are ready to accept offers and perform daily deliveries during the period. Supply hours
represent the aggregate number of robot hours per day during which we can utilize our robots for delivery. Supply hours increase as we
add active robots and increase the operating window of those robots in a day. We closely monitor and strive to efficiently increase our
fleet’s daily supply hours.

56

Liquidity and Capital Resources

Net cash generated by financing activities is
our primary source of liquidity. As of December 31, 2023, we had current assets of $1.46 million and current liabilities of $6.39 million,
which included $0.01 million in cash and cash equivalents.

We plan to raise additional working capital to
fund operations through the issuance of stock to investors and/or issuance of notes payable. We believe, but there is no assurance, that
the net proceeds of approximately $10 million from the initial closing of the Private Placement and our existing cash and cash equivalents
will be sufficient to fund our current operating plans.

Our ability to continue as a going concern is
dependent on our ability to raise adequate capital to fund operating losses until we can generate liquidity from our business operations.
To the extent sufficient financing is not available, we may not be able to, or may be delayed in, developing our offerings and meeting
our obligations. We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives
in order to satisfy our working capital and other cash requirements.

Cash Flows

As of December 31, 2023, our cash and cash equivalents
were $0.01 million. The following table shows a summary of our cash flows for the periods presented in millions:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","Change"],["Net cash (used in) provided by:"],["Operating activities","","$","(15,970,878",")","","$","(21,402,786",")","","$","5,431,908"],["Investing activities","","","(4,914",")","","","(4,060,962",")","","","4,056,048"],["Financing activities","","","13,266,829","","","","20,213,606","","","","(6,946,777",")"],["(Decrease) increase in cash and cash equivalents","","$","(2,708,963",")","","$","(5,250,142",")","","$","2,541,179"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash used in operating activities was $15.97
and $21.40 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $5.43 million was attributable primarily
to a decrease in operating expenses including headcount and personnel costs, research and development, and support to revenue-producing
activities.

Investing Activities

Net cash used in investing activities was $0.00
and $4.06 million for the years ended December 31, 2023 and 2022, respectively. The usage of cash in 2022 related to the build of our
second-generation robots, whereas in 2023, there were no new builds of robots.

Financing Activities

Net cash provided by financing activities was
$13.27 and $20.21 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $6.95 million was attributable
primarily to reduced proceeds from SAFEs in 2023 compared to 2022, and lower proceeds from Silicon Valley Bank loan in 2022.

57

Indebtedness

In March 2022, we entered into a term loan
with Silicon Valley Bank for gross proceeds of $2.50 million with a maturity date of March 1, 2025. The loan accrues interest
at the greater of 3.25% or prime rate. Principal payments commenced on October 1, 2022, and the loan is repayable in 30 installments
of principal and accrued interest.

We also entered into an equipment financing lease
agreement with Farnam in June 2022, commencing November 2022, for the cost of building robots, calling for 24 monthly payments
of approximately $0.19 million based on an expected total cost of $4.46 million of robot parts and manufacturing costs. In December
2023, the agreement was modified for three monthly payments of approximately $0.03 million and 12 monthly payments of approximately $0.19
million, subject to certain terms and effective in 2024.

Contractual Obligations and Commitments

The following is a summary of our significant
contractual obligations as of December 31, 2023.

[[GREPCENT_TABLE]]
[["","","Remaining Period of 2024","","","More than One Year and Less than Three Years","","","More than Three Years and Less than Five Years","","","More than Five Years","","","Total"],["Operating lease obligations","","$","527,983","","","","214,775","","","","-","","","","-","","","","742,758"],["Loan Financing Facility","","","1,070,000","","","","250,000","","","","-","","","","-","","","","1,320,000"],["Equipment Financing Facility","","","2,363,807","","","","-","","","","-","","","","-","","","","2,363,807"],["Total","","$","3,961,790","","","","464,775","","","","-","","","","-","","","","4,426,565"]]
[[/GREPCENT_TABLE]]

On December 31, 2021, we entered into a strategic
supply agreement with a manufacturer of component parts used for our robot assets. The agreement calls for a minimum of $2.30 million
in purchases over a two-year period ending December 2023. At the end of the two-year period, the vendor may invoice us for any shortfall
in orders. As of December 31, 2023, the minimum purchase commitment was extended one year.

We have minimum spend agreements related to simulation
software and storage services. The purchase commitments extend for a period of two to three years.

Off-Balance Sheet Transactions

We did not have during the periods presented,
and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial
partnerships, such as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.

58

Critical Accounting Policies and Estimates

Our consolidated financial statements and the
related notes thereto included in this report are prepared in accordance with United States generally accepted accounting principles.
The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses, and related disclosures. Our most critical accounting estimates relate to impairment
of long-lived assets, valuation of SAFEs, stock-based compensation and right of use assets and liabilities. These estimates are critical
as they require management judgment for inputs that are not observable. These estimates are developed based on historical experience and
various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the
estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial
statement presentation, financial condition, results of operation, and cash flows will be affected. We believe that the accounting policies
described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are most critical
to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

We account for revenue in accordance with ASC 606
– Revenue from Contracts with Customers (“ASC 606”). We determine revenue recognition through the following steps:

[[GREPCENT_TABLE]]
[["","\u25cf","Identification of a contract with a customer;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Identification of the performance obligations in the contract;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Determination of the transaction price;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Allocation of the transaction price to the performance obligations in the contract; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Recognition of revenue when or as the performance obligations are satisfied."]]
[[/GREPCENT_TABLE]]

Revenue is recognized when control of the promised
goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for
those goods or services. As a practical expedient, we do not adjust the transaction price for the effects of a significant financing component
if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less.

To date, we have generated initial revenues from
our delivery services as well as branding fees. For delivery services, we satisfy our performance obligation when the delivery is complete,
which is the point in time control of the delivered product transfers to the customer. We recognize branding fees over time as performance
obligations are completed over the term of the agreement.

Lease Recognition

We account for leases under ASC 842 – Leases.
We do not apply the recognition requirements for leases with a term of twelve months or less. We determine if an arrangement is a lease,
or includes an embedded lease, at inception for each contract or agreement. A contract is or contains an embedded lease if the contract
meets all of the below criteria:

[[GREPCENT_TABLE]]
[["","(i)","there is an identified asset;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(ii)","we obtain substantially all of the economic benefits of the asset; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(iii)","we have the right to direct the use of the asset."]]
[[/GREPCENT_TABLE]]

59

Our operating lease agreements include office
and warehouse space. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and operating
lease liabilities represent the obligation to make payments arising from the lease or embedded lease. Operating lease ROU assets and operating
lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term.
As most leases do not provide an implicit rate, we use an incremental borrowing rate that is based on the estimated rate of interest for
a collateralized borrowing of a similar asset, using a similar term as the lease payments at the commencement date. Indirect capital costs
are capitalized and included in the ROU assets at commencement.

The operating lease ROU assets and operating lease
liabilities include any lease payments made, including any variable amounts that are based on an index or rate, and exclude lease incentives.
Variability that is not due to an index or rate, such as payments made based on hourly rates, are excluded from the lease liability. Lease
terms may include options to extend or terminate the lease.

Renewal option periods are included within the
lease term and the associated payments are recognized in the measurement of the operating ROU asset and operating lease liability when
they are at our discretion and considered reasonably certain of being exercised. Over the lease term, we use the effective interest rate
method to account for the lease liability as lease payments are made and the ROU asset is amortized in a manner that results in straight-line
expense recognition.

We have elected the practical expedient not to
recognize leases with an initial term of 12 months or less on our balance sheets and lease expense is recognized on a straight-line
basis over the term of the short-term lease.

Stock-Based Compensation

We account for stock-based compensation in accordance
with ASC 718, Compensation - Stock Compensation. We measure all stock-based awards granted to employees, directors and non-employee
consultants based on the fair value on the date of the grant and recognizes compensation expense for those awards, net of estimated forfeitures,
over the requisite service period, which is generally the vesting period of the respective award. For awards with service-based vesting
conditions, we record the expense for using the straight-line method. For awards with performance-based vesting conditions, we record
the expense if and when we conclude that it is probable that the performance condition will be achieved.

We classify stock-based compensation expenses
in our statement of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award
recipient’s service payments are classified.

The fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option-pricing model. We historically have been a private company and lacks company-specific
historical and implied volatility information for our stock. Therefore, we estimate our expected stock price volatility based on the historical
volatility of publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding
the volatility of our own traded stock price. The expected term of our stock options has been determined utilizing the “simplified”
method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S.
Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.
Expected dividend yield is based on the fact that we have never paid cash dividends on common stock and do not expect to pay any cash
dividends in the foreseeable future. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions.
The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent
uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions,
stock-based compensation expenses could be materially different for future awards.

Emerging Growth Company and Smaller Reporting
Company Status

We are an “emerging growth company,”
as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period
for complying with new or revised accounting standards. This provision allows an emerging growth company to either early adopt or delay
the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the
extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively
and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable
to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We are also a “smaller reporting company”
meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100
million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value
of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently
completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting
company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements
that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two
most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies,
smaller reporting companies have reduced disclosure obligations regarding executive compensation.