The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred significant losses
since inception, incurred a loss of $2,302,529 for the six months ended June 30,
2022 and, as of June 30, 2022, the Company has an accumulated deficit of
$60,125,631, total stockholders' deficit of $10,428,954, negative working
capital of $10,351,150 and cash of $44,150. The Company used $991,845 and
$393,957 of cash in operations during the six months ended June 30, 2022 and
2021, respectively, which was funded primarily by proceeds from loans from
related parties and others. There is no assurance that any such financing will
be available in the future. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company is currently
pursuing the following sources of short and long-term working capital:
The Company has selected targeted parties that it is actively working with who
are interested in licensing, purchasing the rights to, or establishing a joint
venture to commercialize applications of the Company's technology;
The Company continues to seek capital from certain strategic and/or government
grant opportunities and related sources. These sources may, pursuant to any
agreements that may be developed in conjunction with such funding, assist in the
product definition and design, roll-out and channel penetration of products;
and
The Company is actively working with newer investors, private equity companies,
purchase order financing parties, and seemingly increased its value and
potential to attract new investors in the eyes of the Management team when the
Company completed the exchange program of 'debt to equity' in the 2nd quarter of
2021 clearing out all convertible debt in exchange for equity at a fixed price
at the end of the second quarter of 2021.
Failure by us to timely procure additional financing or investment adequate to
fund the ongoing operations, including planned product development initiatives
and commercialization efforts, or experience a major supply chain disruption
will have material adverse consequences on our financial condition, results of
operations and cash flows as could any unfavorable terms. While we believe the
Company's prospects have improved for funding, there are no assurances we will
be able to obtain the financing and planned product development
commercialization. The Company may fail to reach an accord with the Senior
Secured Note Holder who has deep rights with the assets of the Company pledged
as security for repayment of the Note. Accordingly, we may not have the ability
to continue as a going concern. The financial statements of the Company do not
include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary should we be unable to continue as a going concern.
Note 3. Significant Accounting Policies
The significant accounting policies followed are:
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates underlying the Company's reported financial position and
results of operations include the allowance for doubtful accounts, fair value of
stock-based compensation, fair value of derivative liabilities, valuation
allowance on deferred taxes and the warranty reserve.
Revenue recognition - The Company has adopted the new revenue recognition
guidelines in accordance with ASC 606, Revenue from Contracts with Customers
(ASC 606). The Company analyzes its contracts to assess that they are within the
scope and in accordance with ASC 606. In determining the appropriate amount of
revenue to be recognized as the Company fulfills its obligations under each of
its agreements, whether for goods and services or licensing, the Company
performs the following steps: (i) identification of the promised goods or
services in the contract; (ii) determination of whether the promised goods or
services are performance obligations including whether they are distinct in the
context of the contract; (iii) measurement of the transaction price, including
the constraint on variable consideration; (iv) allocation of the transaction
price to the performance obligations based on estimated selling prices; and (v)
recognition of revenue when (or as) the Company satisfies each performance
obligation. The Company acts as a principal in its revenue transactions as the
Company is the primary obligor in the transactions. Generally, the Company
recognizes revenue for its products upon shipment to customers, provided no
significant obligations remain and collection is probable.
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In certain instances, the Company's ConsERV system product may carry a limited
warranty of up to one year for all parts contained therein except for the energy
recovery ventilator core produced and sold by the Company. The distributor of
the ConsERV system may carry a limited warranty of up to ten years. The limited
warranty includes replacement of defective parts for the ConsERV system and
includes workmanship and material failure for the ConsERV core. The Company
recorded an accrual of $91,531 for future warranty expenses at June 30, 2022,
and December 31, 2021, which is included in accrued expenses, other.
Royalty revenue is recognized as earned. The Company recognized royalty revenue
of $0 for the three months ended June 30, 2022 and 2021, respectively. Revenue
derived from the sale of licenses is deferred and recognized as license fee
revenue on a straight-line basis over the life of the license, or until the
license arrangement is terminated. The Company recognized license fee revenue of
$12,500 and $12,500 for the three months ended June 30, 2022 and 2021,
respectively and $25,000 and $25,000 for the six months ended June 30, 2022 and
2021, respectively.
The Company accounts for revenue arrangements with multiple elements under the
provisions of ASC Topic 605-25, "Revenue Recognition-Multiple-Element
Arrangements." To account for these agreements, the Company must identify the
deliverables included within the agreement and evaluate which deliverables
represent separate units of accounting based on if certain criteria are met,
including whether the delivered element has stand-alone value to the licensee.
The consideration received is allocated among the separate units of accounting,
and the applicable revenue recognition criteria are applied to each of the
separate units.
In December 2017, the Company and Zhejiang MENRED Environmental Tech Co, Ltd.,
Zhejiang Province, China ("Menred"), entered into a License and Supply Agreement
(the "Agreement"), effective December 21, 2017. Pursuant to the Agreement, the
Company licensed certain intellectual property and improvements to Menred, for
use in the manufacture and sale of energy recovery ventilators ("ERV") and
certain other HVAC systems for installation in commercial, residential, or
industrial buildings in China. Menred also agreed to purchase its requirements
of certain products from the Company for Menred's use, pursuant to the terms and
conditions of the Agreement. Menred will also pay royalties, as defined, to the
Company on a quarterly basis, based on price and production volume as provided
by Menred. No royalties are due within the first year of the Agreement. Also
pursuant to the Agreement, the Company is required to purchase 50,000 square
meters of Product from Menred for delivery as an annual minimum with a 10,000
square meter minimum order quantity per delivery. The Agreement has a ten-year
term with mutually agreed upon five-year extensions. Shipping and handling fees
billed to customers are included in revenue. Shipping and handling fees
associated with freight are generally included in cost of revenue.
Cash and cash equivalents - For purposes of the Statements of Cash Flows, the
Company considers all highly liquid debt instruments with a maturity of three
months or less to be cash equivalents. Cash and cash equivalents are maintained
at financial institutions, and, at times, balances may exceed federally insured
limits. The Company had uninsured balances of approximately $0 and $483,000 at
June 30, 2022 and December 31, 2021, respectively. The Company has never
experienced any losses related to these balances. The company does not have any
cash equivalents at June 30, 2022 and December 31, 2021.
Concentrations - At June 30, 2022, two customers accounted for 100% of accounts
receivable. At December 31, 2021, two customers accounted for 100% of accounts
receivable. For the six months ended June 30, 2022, four customers accounted for
90% of total revenue. For the six months ended June 30, 2021, three customers
accounted for 74% of total revenue.
Fair Value of Financial Instruments - The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses, deferred revenue, customer deposits and notes payable are
carried at historical cost. At June 30, 2022 and December 31, 2021 the carrying
amounts of these instruments approximated their fair values because of the
short-term nature of these instruments.
Inventory - Inventory consists of raw materials, work-in-process and finished
goods and is stated at the lower of cost, determined by first-in, first-out
method, or market. Market is determined based on the net realizable value, with
appropriate consideration given to obsolescence, excessive levels,
deterioration, and other factors. At June 30, 2022 and December 31, 2021, the
Company had $82,040 and $59,631 of raw materials, $106,541 and $1,844 of
in-process inventory and $23,574 and $10,592 of finished goods inventory,
respectively. A reserve is recorded for any inventory deemed excessive or
obsolete. No reserve is recorded at June 30, 2022 and December 31, 2021,
respectively.
Property and equipment - Property and equipment is recorded at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 7 years. Leasehold improvements are
amortized over the shorter of their estimated useful lives of 5 years or the
related lease term. Depreciation expense was $2,317 and $367 for the three
months ended June 30, 2022 and 2021, respectively, and $4,167 and $1,355 for the
six months ended June 30, 2022 and 2021, respectively. Gains and losses upon
disposition are reflected in the Statement of Operations in the period of
disposition. Maintenance and repair expenditures are charged to expense as
incurred. There were no dispositions of property and equipment in 2022 or 2021.
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Intangible assets - Identified intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company's existing intangible assets consist solely
of patents. Patents are amortized over their estimated useful or economic lives
of 17 years. Patent amortization expense was $4,951 and $4,688 for the three
months ended June 30, 2022 and 2021, respectively and $9,782 and $9,250 for the
six months ended June 30, 2022 and 2021, respectively. Based on current
capitalized costs, total patent amortization expense is estimated to be
approximately $19,400 per year for the next five years and thereafter.
Research and development expenses and funding proceeds - Expenditures for
research and development are expensed as incurred. The Company incurred research
and development costs of $61,748 and $56,215 for the three months ended June 30,
2022 and 2021, respectively and $126,621 and $100,812 for the six months ended
June 30, 2022 and 2021, respectively. The Company accounts for proceeds
received from government funding for research as a reduction in research and
development costs. The Company recorded proceeds against research and
development expenses on the Statements of Operations of $0 and $29,886 for the
three months ended June 30, 2022 and 2021, respectively and $0 and $60,966 for
the six months ended June 30, 2022 and 2021, respectively.
Derivative Liability - The Company, up until June 30, 2021, had financial
instruments that are considered derivatives or contain embedded features subject
to derivative accounting. Embedded derivatives are valued separately from the
host instrument and are recognized as derivative liabilities in the Company's
balance sheet. The Company measures these instruments at their estimated fair
value and recognizes changes in their estimated fair value in results of
operations during the period of change.
Fair Value Measurements - The Company accounts for financial instruments in
accordance with ASC 820 "Fair value Measurement and Disclosures". ASC 820
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. ASC 820 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. ASC 820 also establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from independent sources (observable inputs) and (2) an
entity's own assumptions about market participant assumptions developed based on
the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:
· Level 1 - Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or liabilities.
· Level 2 - Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g. interest rates); and inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
· Level 3 - Inputs that are both significant to the fair value measurement
and unobservable.
The reconciliation of the derivative liability measured at fair value on a
recurring basis using unobservable inputs (Level 3) is as follows for the six
months ended June 30, 2021:
June 30,
2021
Balance, beginning of period $ 3,845,662
Additions 124,290
Extinguished derivative liability (1,728,274 )
Change in fair value of derivative liabilities (2,241,678 )
Balance, end of period
$ -
Earnings (loss) per share - Basic income (loss) per share is computed by
dividing net income (loss) attributable to common stockholders by the weighted
average common shares outstanding for the period. Diluted loss per share is
computed giving effect to all potentially dilutive common shares. Potentially
dilutive common shares may consist of incremental shares issuable upon the
exercise of stock options and warrants. In periods in which a net loss has been
incurred, all potentially dilutive common shares are considered anti-dilutive
and are excluded from the calculation. Common share equivalents of 32,576,731
were excluded from the computation of diluted earnings per share for the three
and six months ended June 30, 2022 because their effect is anti-dilutive.
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Reconciliation of diluted loss per share for the three and six month periods
ended June 30, 2021 is as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2021 2021
Net income attributable to common shareholders $ 75,544 $ 1,818,604
Income attributable to note derivatives
Change in fair value of derivatives
(60,311 ) (2,241,678 )
Gain on extinguishment of debt (1,148,554 ) (1,148,554 )
Expense attributable to note derivatives
Interest expense 88,756 216,378
Diluted loss attributable to common shareholders $ (1,044,565 ) $ (1,355,250 )
Basic shares outstanding 3,691,248 1,994,429
Derivative notes and interest shares 4,639,561 5,831,493
Diluted shares outstanding 8,330,809 7,825,922
Diluted loss per share $ (0.13 ) $ (0.17 )
The Company had no derivative liabilities so measured for the three and six
months ended June 30, 2022 and accordingly no diluted loss per share over those
periods.
Recent Accounting Pronouncements - Recent accounting pronouncements issued by
the FASB and the SEC did not or are not believed by management to have a
material impact on the Company's present or future consolidated financial
statements.
Note 4. Accrued Expenses, Other
Accrued expenses, other consists of the following:
June 30, December 31,
2022 2021
Accrued expenses, other $ 659,970 $ 656,810
Accrued interest 2,496,683 2,197,577
Accrued warranty costs 91,531 91,531
$ 3,248,184 $ 2,945,918
Note 5. Related Party Transactions
The Company rents a building that is owned by two stockholders of the Company,
one of which is the Chief Executive Officer. Rent expense for this building is
$4,066 per month, including sales tax. The Company recognized rent expense
related to this lease of $12,198 and $12,198 for the three months ended June 30,
2022 and 2021, respectively and $24,396 and $24,396 for the six months ended
June 30, 2022 and 2021, respectively. The lease term will terminate upon 30
days' written notice from landlord or 90 days written termination from us. The
lease is considered to be short term or month to month.
The Company has accrued compensation due to the Chief Executive Officer as of
June 30, 2022 and December 31, 2021 of $2,089,467 and $2,071,380, respectively,
included in accrued compensation and related benefits in the accompanying
balance sheets.
On June 24, 2016, the Company entered into a Loan and Security Agreement
("Security Agreement") with the entity known as PKT Strategic Assets, LLC (the
"Holder") pursuant to which the Company issued a Senior Secured Promissory Note
for $150,000 (the "Note"). The Note has an interest rate is 12% per annum
compounded daily with a minimum interest payment of $2,000. The Note grants the
Holder a secured interest in all the assets of the Company. During 2016 to the
period ended June 30, 2022, the Holder extended the Note pursuant to various
amendments. Pursuant to the amendments, the principal amount and interest
totaled $4,532,333 (including fees and other expenses). The Holder's corporation
is controlled by Ms. Tangredi, related to Tim Tangredi: the Company's CEO and
stockholder, and therefore, is a Related Party of the Company. The Company is to
pay the Holder the principal, plus all interest and fees due in accordance with
terms and conditions of the Security Agreement on the earlier of: (i) the date
upon which the Company secures funds, regardless of source, equal to or
exceeding, in the aggregate, $1,000,000 or (ii.) November 1, 2021 which has
expired. The Holder has not declared the Note in Default as the Parties have
reached a tentative agreement to several issues including the extension of the
Maturity Date (the "Maturity Date"). The Parties are working to complete this
agreement during the third quarter of 2022. The Company has recorded interest
expense of $220,395 and $66,370 for the three-month periods ended June 30, 2022
and 2021, respectively and $369,461 and $130,353 for the six-month periods ended
June 30, 2022 and 2021, respectively. We made a payment of fees and accrued
interest totaling $154,398 during the six months ended June 30, 2022. Accrued
interest was $2,367,436 and $2,152,373 at June 30, 2022 and December 31, 2021,
respectively.
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On October 12, 2019, the Company entered a promissory note with an entity
controlled by our Chief Executive Officer in the amount of $10,000. The note
bears interest at 10% per year and matured on October 12, 2021. Interest expense
on the note was $150 for each of the three month periods ended June 30, 2022 and
2021, respectively, and was $300 for each of the three month periods ended June
30, 2022 and 2021, respectively. Accrued interest was $1,650 and $1,350 at June
30, 2022 and December 31, 2021, respectively. The Holder has not declared the
Note in Default or extended the Maturity Date.
On April 29, 2022, the Company received a loan of $100,000 from its Chief
Executive Officer. This was repaid in full on May 17, 2022.
On February 27, 2015, the Company, and Tim N. Tangredi, the Company's Chief
Executive Officer entered an amendment (the "Tangredi Employment Agreement
Amendment") to Mr. Tangredi's Amended and Restated Employment Agreement.
Currently, the Company has non-interest-bearing accrued compensation due to the
Chief Executive Officer for deferred salaries earned and unpaid as described
above. The Tangredi Employment Agreement Amendment provides that, if at any time
during a calendar year, the unpaid compensation is greater than $500,000, Mr.
Tangredi must convert $100,000 of unpaid compensation into the Company's common
stock during such calendar year. The conversion rate shall be equal to 75% of
the average closing price for the Company's common stock for the 30 trading days
prior to the date of conversion. The Company shall also pay to Mr. Tangredi a
cash payment equal to 20% of the compensation income incurred because of the
conversion. The Company has waived the conversion requirement from 2015 to the
present. See Note 13 Commitments and Contingencies for further disclosure of the
terms of Mr. Tangredi's employment agreement.
Further, at any time any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the "beneficial
owner" (as defined in Rules 13(d)-3 and 13(d)-5 under such Act) of greater of
40% of the then-outstanding voting power of the voting equity interests of the
Company or a person or group initiate a tender offer for the Company's common
stock, Mr. Tangredi may convert unpaid compensation into Class A Convertible
Preferred Stock ("Class A Preferred Stock") of the Company at a conversion price
of $1.50 per share. The Board of Directors waived the requirement to convert
$100,000 of unpaid compensation into common stock during 2016. No amounts have
been converted under the terms of the Tangredi Employment Agreement Amendment to
date.
The above terms and amounts are not necessarily indicative of the terms and
amounts that would have been incurred had comparable transactions been entered
into with independent parties.
Note 6. Equity Transactions
Preferred Stock
At June 30, 2022 and December 31, 2021, the Company's Board of Directors has
authorized 10,000,000 shares of preferred stock with a par value of $0.01 to be
issued in series with terms and conditions to be determined by the Board of
Directors.
2,000,000 of the shares of preferred stock had been designated as Class A
Preferred Stock. The Class A Preferred Stock shall entitle the holder thereof to
150 votes on all matters submitted to a vote of the stockholders of the Company.
10,000 of the shares of preferred stock had been designated as Class B Preferred
Stock. The Class B Stock includes the right to vote in an amount equal to 51% of
the votes to approve certain corporate actions, including, without limitation,
changing the name of the Company and increasing the number of authorized
shares.
During January and February 2022, after the Company's fiscal year ended December
31, 2021, the Company's Board of Directors, with input from the Company's
financial advisors, completed its reevaluation of the Company's capital
structure, including the advisability of authorizing addition series of
preferred stock, par value $0.01 ("Preferred Stock"). The Board of Directors
determined that it was in the best interests of the Company and its stockholders
to authorize four new series of Preferred Stock (sometimes referred to as "New
Series of Preferred Stock").
As a result, the Board of Directors and management with the assistance of its
outside financial advisors prepared a Certificate of Amendment to its
Certificate of Incorporation for the purpose authorizing the four New Series of
Preferred Stock, which was subject to the filing by the Company of a Certificate
of Amendment with the Department of State of the State of New York ("Certificate
of Amendment").
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To implement the authorization of the four New Series of Preferred Stock, the
Certificate of Amendment was submitted to the Department of State on March 17,
2022 and was accepted for filing on March 22, 2022. The recently authorized New
Series of Preferred Stock included: (i) Series C Convertible Preferred Stock,
consisting of 100,000 shares, all of which were to be issued following
acceptance of the Certificate of Amendment by the Department of State, to two
(2) third-party accredited investors who had provided bona fide financial
consulting services to the Company; (ii) Series D Convertible Preferred Stock,
consisting of 10,000 shares, which shares may be issued, at the sole discretion
of the Board of Directors, from time to time, to consultants and other third
parties for, among other purposes, new services to the Company and for other
good and valuable consideration, none of which shares have been issued; (iii)
Series E Convertible Preferred Stock, consisting of 250,000 shares, all of which
were to be issued following final acceptance of the Certificate of Amendment by
the Department of State, being issued to three (3) "accredited investors"
including the Company's financial advisors in consideration for their capital
contributions to the Company; and (iv) Series F Convertible Preferred Stock
consisting of 1,500,000 shares, 1,000,000 shares of which are intended to be
issued to several long-tenured key employees and the Company's Board of
Directors in consideration for previously rendered services to the Company as
well as to certain noteholders and others under agreements and arrangements that
have been authorized by the Board of Directors. Equity issuances within these
various classes will take place during the third quarter of 2022.
Common Stock
As of June 30, 2022 and December 31, 2021, the Company has 1,100,000,000
authorized shares of common stock with a par value of $0.01 to be issued in
series with terms and conditions to be determined by the Board of Directors.
2022 Common Stock Transactions
During May 2022, the Company issued 457,500 shares of common stock upon the
conversion of $45,000 of notes payable, plus $750 of costs.
The company issued 396,637 shares of common stock upon the cashless exercise of
500,000 common stock warrants.
The Company cancelled 1,000,000 shares of common stock, which are to be reissued
in the future.
2021 Common Stock Transactions
During the six months ended June 30, 2021, the Company issued 7,036,668 shares
of common stock and 3,576,733 common stock purchase warrants in settlement of
convertible notes payable and related accrued interest. The shares were valued
at $1,829,534 and the warrants were valued at $857,600.
During the six months ended June 30, 2021, the Company issued 2,100,000 shares
of common stock, valued at $567,000, for services.
Note 7. Convertible Notes Payable and Exchange Program
Debt to Equity Exchange Program
In the period from June 2017 through the end of December 2019, the Company
entered eight Convertible Note Holder agreements with eight Note Holders
totaling, with all fees, interest, and principal, $2,008,812 as of December 31,
2020. The notes were not considered to be in default and were being renegotiated
at March 31, 2021. Subsequently, as of May 31, 2021, each Convertible Noteholder
received their fees, interest, and principal totaling $2,107,414 in shares of
Common stock of the Company (at $0.030 per share) with 50% warrant coverage (1
year cash warrant with a strike price of 0.30). All documents were executed by
June 30, 2021, with all equity/warrants issued by July 31, 2021. The Company
issued 7,036,668 Common shares, and 3,576,733 Warrant shares in this
transaction. Please note all Warrant Shares expired as of May 15, 2022 per the
terms and conditions of the Warrant document.
2022 Convertible Notes
On June 15, 2022, the Company entered into two convertible promissory notes
aggregating $300,000. The notes mature on the earlier of December 15, 2022 or 10
days after demand and bear interest at 8% per year. The Company received
proceeds of $300,000. The notes are convertible into shares of common stock at a
fixed conversion price of $0.30 per share. The Company has recorded debt
discount of $200,000, related to the beneficial conversion feature of the notes.
The discount will be amortized to interest expense over the six-month term of
the notes, and $17,486 was amortized during the three and six months ended June
30, 2022.
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2021 Convertible Notes
On September 20, 2021, the Company entered a convertible promissory note with GS
Capital Partners, LLC. The note matures on September 20, 2022 and bears interest
at 8% per year. The Company received proceeds of $197,000, after deduction of
$20,000 of original issue discount and $3,000 of costs. In connection with this
note, the Company has issued a warrant to purchase 1,466,666 shares of common
stock to the lender. The warrant has an exercise price of $0.15 per share and
expires on September 21, 2026. The relative fair value of the warrant was
$110,000, determined using the Black Scholes Model with the following
assumptions: (1) risk free interest rate of 0.84%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of the Company's common stock of
389%; and (4) an expected life of 5 years. The note is convertible into shares
of common stock at a fixed conversion price of $0.10 per share. The company has
recorded a beneficial conversion feature of $90,000. Amortization of discount
and costs was $55,597 and $110,584 for the three and six months ended June 30,
2022, respectively.
During the fourth quarter of 2021, the Company entered into twenty convertible
promissory notes with various holders aggregating $1,412,000. The notes mature
one year from issuance and bear interest at 8% per year. The Company received
proceeds of $1,287,000, after deduction of $117,000 of original issue discount
and $8,000 of costs. In connection with the notes, the Company has issued
warrants to purchase 10,463,332 shares of common stock to the lenders. The
warrants have an exercise price of $0.15 per share and expire five years from
the date of issuance. The relative fair value of the warrants was $1,366,127,
determined using the Black Scholes Model with the following assumptions: (1)
risk free interest rate of 0.84% - 1.33%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of the Company's common stock of
386% - 389%; and (4) an expected life of 5 years. The notes are convertible into
shares of common stock at a fixed conversion price of $0.10 per share. A total
of $1,412,000 has been recorded as debt discount, and 8,000 has been recorded as
deferred debt costs. The discount and costs will be amortized to interest
expense over the term of the notes Amortization of discount and costs was
$349,355 and $699,492 for the three and six months ended June 30, 2022,
respectively.
During May 2022, the Company issued 457,500 shares of common stock upon the
conversion of $45,000 of notes payable, plus $750 of costs. Unamortized discount
and debt costs related to the principal converted were $21,206 and $514,
respectively, which were charged against interest expense upon conversion.
The Company's convertible promissory notes at June 30, 2022 and December 31,
2021 are as follows:
June 30, December 31,
2022 2021
Convertible notes payable, bearing interest at 8- 10% $ 1,887,000 $ 1,453,960
Unamortized debt discount
(785,303 ) (1,428,726 )
Unamortized deferred debt issuance cost (3,254 ) (9,112 )
Total 1,098,443 194,162
Current portion $ 1,098,443 $ 194,162
Note 8. Derivative Liabilities
The Company had identified certain embedded derivatives related to its
convertible notes. Since the notes were convertible into a variable number of
shares or have a price reset feature, the conversion features of those notes
were recorded as derivative liabilities. The accounting treatment of derivative
financial instruments requires that the Company record fair value of the
derivatives as of the inception date and to adjust to fair value as of each
subsequent balance sheet date.
The Company has recorded additions to the derivative conversion liabilities
related to the conversion feature attributable to interest accrued during the
period. These additions totaled $49,157 and $97,254 for the three months ended
June 30, 2021 and 2020, respectively, and $124,290 and $261,946 for the six
months ended June 30, 2021 and 2020, respectively and were charged to interest
expense.
During the three and six months ended June 30, 2021, through the date of
settlement of the debt, the Company recorded income of $60,311 and $2,241,678
related to the change in the fair value of the derivatives. The fair value of
the embedded derivatives was $1,728,274 at the date of settlement, determined
using the Black Scholes Model with the following assumptions: (1) risk free
interest rate of 0.01%; (2) dividend yield of 0%; (3) volatility factor of the
expected market price of the Company's common stock of 315%; and (4) an expected
life of 3 months.
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During the second quarter of 2021 the Company issued 7,036,668 shares of common
stock, valued at $1,829,534 and 3,576,733 warrants, valued at $857,600, in
settlement of $1,453,960 of notes payable and $653,454 of accrued interest.
Derivative liability of $1,728,274 was extinguished because of the settlement.
The Company recorded a gain on extinguishment of $1,148,554.
Note 9. Commitments and Contingencies
Litigation
From time to time, claims are made against the Company in the ordinary course of
its business, which could result in litigation. Claims and associated litigation
are subject to inherent uncertainties and unfavorable outcomes could occur, such
as monetary damages, fines, penalties, or injunctions prohibiting the Company
from selling one or more products or engaging in other activities. The
occurrence of an unfavorable outcome in any specific period could have a
material adverse effect on the Company's results of operations for that period
or future periods.
In 2015, the Company commenced an action for the cancellation of shares issued
to Soex (the "Shares") in connection with a breached Securities Purchase
Agreement and Distribution Agreement entered 2014.
The Soex Litigation was tried in U.S. District Court for the Middle District of
Florida in October of 2018. The jury at the conclusion of the trial did not
award monetary damages to either party for claims or counterclaims.
On October 24, 2018, the Company initiated a third lawsuit against an affiliate
of Soex, Zhongshan Trans-Tech New Material Technology Co. Ltd. Zhongshan, China,
("Transtech"), and the Chairperson of the affiliate and Soex, based on new
information learned by the Company. The Company will seek maximum relief and
damages for this on-going and growing illegal misuse the Company's Intellectual
Property. The Company feels this third action will lead in a judgment in favor
of the Company.
On October 8, 2021 the Company was notified of a unusual order by the Federal
District Court judge who oversaw the initial 2018 proceedings. This activity was
initiated at the request of Soex's counsel. The Order awards the defendant
(Soex) $300,568 in attorney's fees and $82,096 in costs for a total award of
$382,664 to be paid by Dais. The Order doesn't specify the date by which the
award needs to be paid. The sum is recorded in accrued liabilities.
The Company will vigorously defend itself against this Order, as well as move on
all possible avenues open to it to stop, what Management believes, is an
on-going misuse of the Company's core Intellectual Property. The Company
believes - based on the content of the Order and other admissions and actions on
the part of others - it has a chance to prevail in an appeal to the benefit of
the Company and its shareholders.
Accounts Payable
The firms below have pursued legal action against the Company to collect overdue
accounts payable sums. The Company is working with each to enter into a
settlement plan, or "pay over time" payment plan. To date the Company has an
agreement in place with SoftinWay.
Company Sum Owned Payment Plan Legal Action
Old Dominion Freight Line $ 13,576.95 No Yes
Power Plant Services $ 85,199.11 No Yes
SoftinWay $ 4,850.00 Yes Yes
The O-Ring Store $ 10,334.00 No Yes
Total $ 113,960.06
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Note 10. Subsequent Events
On July 12, 2022 the Company was informed its loan forgiveness application had
been accepted for its second and final Payroll Protection Plan loan. The SBA
has forgiven the loan amount in full.
On July 28, 2022 the Company accepted the following sums for general operation
expenses:
$30,000 and $62,800 (total $92,800) from the PKT Strategic Technologies, LLC,
the Senior Note Holder under the same terms and conditions as the existing sums
of money which have been loaned to the Company since June 16, 2016.
$5,000 and $2,000 (total of $25,000) from Draper Capital Partners (under the
same terms and conditions as the previous sums of money which have been loaned
to the Company).
No other material events have occurred after June 30, 2022 requiring recognition
or disclosure in the financials.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to current and future events and
financial performance. You can identify these statements by forward-looking
words such as "may", "will", "expect", "anticipate", "believe", "estimate" and
"continue", or similar words. Those statements include statements regarding the
intent, belief or current expectations of the management team as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the Securities and
Exchange Commission. Important factors currently known to us could cause actual
results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that its assumptions are
based upon reasonable data derived from and known about our business and
operations and the business and operations of the Company. No assurances are
made that actual results of operations or the results of our future activities
will not differ materially from its assumptions. Factors that could cause
differences include, but are not limited to, expected market demand for the
Company's services, fluctuations in pricing for materials, and competition.
Unless otherwise indicated or the context requires otherwise, the words "we",
"us", "our", the "Company" or "our Company" refer to Dais Corporation, a New
York corporation, and its subsidiaries.
The Company is dependent on third parties to manufacture the key components
needed for its nanostructured materials and some parts of the value-added
products made with these materials. Accordingly, a suppliers' failure to supply
components in a timely manner, or to supply components that meet the Company's
quality, quantity and cost requirements or technical specifications, or the
inability to obtain alternative sources of these components on a timely basis or
on acceptable terms, would create delays in production of the Company's products
and/or increase its unit costs of production. Certain of the components or the
processes of the Company's suppliers are proprietary. If the Company was ever
required to replace any of its suppliers, it should be able to obtain comparable
components from alternative suppliers at comparable costs, but this would create
a delay in production and may briefly affect the Company's operations.
Covid-19 World-wide Pandemic
Effects from the pandemic are still impacting economies, and routine life,
across the globe, however, improvements are being made and economies are
opening. The Company is uniquely positioned as its' current products are
designed to provide a solution to these issues especially with increased
ventilation. The awareness of the benefits of increased ventilation in homes and
workplaces are being cited as a major factor by customers as a solution to
battle future outbreaks and other pandemics. The ConsERV products are
specifically designed to increase new, fresh, ventilated, air in our homes and
workplaces. Management is developing and executing on plans to increase product
awareness through existing and prospective sales channels.
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Climate Change and Carbon Reduction
Countries and corporations around the world are adopting aggressive plans to
achieve newly established Carbon Neutral goals by 2030 and 2050. This world-wide
effort is attracting attention to innovative technologies which reduce carbon
emissions. Management is confident the successful track record of current
products, with a history of increasing the efficiency of HVAC systems and
reducing CO2 emissions should drive increased business activity.
Volatile Share Price
Beginning in mid-October of 2021 the Company's share price on the OTCM has risen
from a low of $.05 per share to a high price of $3.15 per share, and places in
between. We believe the market for the Company's products and planned products
is broadening worldwide, spawning increased interest in Dais. This coupled with
Management executing against its business plan working to grow revenues
increasing shareholder value are what we believe may be the reason for a
potential jagged up and down nature of the Company's share price.
Overview
Dais Corporation ("Dais", "us," "we,", the "Company") is a nanomaterial
technology company developing and commercializing products using the
nanomaterial called Aqualyte. The first commercial product is the Aqualyte
nanomaterial itself. It is useful in managing moisture and key gases in a
variety of cross-industry products, and is effective in the destruction of
pathogens that come in contact with the material, (As verified by 3rd part
analysis).
The second commercial product is called ConsERV, a fixed plate energy recovery
ventilator which is useful in meeting building indoor fresh air requirements
while saving energy and lowering emissions for most forms of heating,
ventilation, and air conditioning (HVAC) equipment. We continue to develop other
Aqualyte uses in cross-industry applications, HVAC/Refrigeration, energy, etc.
One area of focused attention has been development work on a variant of Aqualyte
targeting surface treatments to potentially create a protective layer designed
to inactivate human coronaviruses.
Corporate History
We were incorporated as a New York corporation on April 8, 1993 as Dais
Corporation. The Company was formed to develop new, cost-effective polymer
materials for various applications, including providing a lower cost membrane
material for Polymer Electrolyte Membrane fuel cells. We believe our research on
materials science has yielded technological advances in the field of selective
ion transport polymer materials.
In December 1999, the Company purchased the assets of Analytic Power
Corporation, a corporation founded in 1984 to provide design, analysis, and
systems integration services in the field of fuel cells, fuel processors, and
integrated fuel cell power systems. Subsequently, on December 13, 1999, the
Company changed its name to Dais Analytic Corporation. In the ensuing years the
Company has purchased and/or sold assets for cash and/or assumption of certain
company's obligations seeking a path to solid, continuing growth, or monetize
non-performing Company assets.
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In November of 2018 the board of directors unanimously voted to change the name
of the Company from Dais Analytic Corporation to Dais Corporation (the "Name
Change"). The Name Change took effect with FINRA on February 27, 2019.
Our Technology
AqualyteTM
We use proprietary nanotechnology to reformulate thermoplastic materials called
polymers, creating a material which water and a select group of similar
substances can permeate through at a molecular level as opposed to flowing in
bulk as liquid water through a pore. At the same time, the permeability of
oxygen, nitrogen, and most other substances is severely limited, making the
material extremely selective. We call this specialized material AqualyteTM and
we have been granted a series of patents relating to its manufacture and use.
AqualyteTM is the foundation of the Dais product line, using the unique
material's properties to enable differentiated air, energy, and water products.
Products generally are highly efficient, have fewer or no moving parts, and
notably are kinder and gentler to our planet Earth. The nanomaterial-based
products market is growing worldwide as more eyes are on the accelerating push
for highly efficient products like those Dais features.
ConsERVTM
Sales channels for our ConsERV product continues to expand. This is our HVAC
energy conservation product which should save an average of 30% on HVAC
ventilation air operating costs while providing increased amounts of ventilated
air. The economic savings typically allow the remainder of the system to be
smaller and less expensive, reducing carbon dioxide (CO2) emissions from
electrical power generation. ConsERV generally attaches onto existing HVAC
systems and is useful in both commercial and residential structures, to provide
improved ventilation air within the structure. In turn, this yields health
benefits (reduced COVID-19 exposure, fewer allergy, and asthma 'trigger'
contaminants) and productivity improvements (improvement in cognitive
abilities).
ConsERV separates incoming fresh ventilation air from outgoing exhaust air with
our Aqualyte nanotechnology polymer in an enthalpy heat exchanger referred to as
a "core". While Aqualyte physically isolates the air streams so they don't mix,
heat and moisture are freely exchanged through the material. For summer air
conditioning, the core removes some of the heat and humidity from the incoming
air and transfers it to the exhaust air stream, thereby saving energy under many
conditions. For winter heating, the core typically recovers a portion of the
heat and humidity in the exhaust air and transfers it into the incoming air to
reduce heating requirements.
When compared to similar competitive products, we believe, based on test results
conducted by the Air-Conditioning, Heating and Refrigeration Institute (AHRI), a
leading industry association, ConsERV maintains an industry-leading position in
the management of latent heat.
The market, as near as management can tell, for energy recovery ventilation
equipment is changing to become broader and better understood. Management
believes this change is linked to the industry's specification-setting body
(ASHRAE) and the US Centers for Disease Control stating that pathogens can and
do travel via HVAC systems and duct work as reported by the White House Science
Advisory Panel, the US EPA, NIH/Harvard, Trane Corporation, and more. This
potential change in the market for ERVs coupled with the seemingly proven value
proposition Dais's ConsERV product provides optimism to the Management team and
the Board of Directors for the future of the ConsERV product.
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The Company began engineering for an updated line of ConsERV products in the
year 2020 (known as the "N Series") with new cores and packaged systems that
incorporate the Company's past experience with the ERV market. The line was
certified by the needed outside agencies and initial market introduction began
in the 4th quarter of 2021. We have seen positive market reception to date, and
believe based on the N Series performance, price-point, and end-user feedback,
the product will continue to be well received in the market. Sales of existing
cores and customer systems are expected to continue generating revenue during
2022 and beyond as we increase the number of sales channels for ConsERV. The
newer N Series has begun contributing to increasing revenues in the second
quarter of 2022 and beyond.
Product Summary
Dais's advanced material has many demonstrated uses in the described products.
Management is positioning most of the Company's resources behind the two most
mature products in two major revenue generating paths: (1) ConsERV cores and
systems, and (2) the sale of Aqualyte nanomaterials and engineering support in
areas where Aqualyte has shown proven results and Dais has partners well-placed
to bring products to market. Management projects this narrower focus will
increase revenues allowing profitability to occur faster. This strategy
leverages the Company's experience and depth in marketing, building, and selling
ConsERV cores and systems and in manufacturing and selling high performance
Aqualyte nanomaterial.
Sales activities for advanced materials are continuing with select, successful
companies located in the European Union and Southeast Asia (including China)
which take full advantage of Dais's past and continuing market penetration
efforts. The uses include energy recovery ventilation and other known HVAC and
select cross-industry uses.
To help us support our capabilities to deliver ConsERV cores and systems, and
Aqualyte advanced nanomaterials, we have qualified manufacturing companies to
join our supply chain to produce materials and components. Guided by
Dais-qualified manufacturing practices these efforts target the growing demand
for product in North America, European Union, and Southeast Asia (including
China). We project this expansion of the supply chain will result in lower costs
and quicker order fulfillment, generating revenues faster.
Orders are already being generated from these agreements, and we expect them to
increase as we expand and add new strategic partnerships along the way. The new
orders include sales of Aqualyte nanomaterials, components for energy recovery
ventilation, and other known HVAC and select cross industry products.
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Results of Operations
Three Months Ended June 30, 2022 Compared to June 30, 2021
The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations:
For the Three Months Ended
June 30,
2022 2021
REVENUE
Sales $ 117,699 $ 109,181
Royalty and license fees 12,500 12,500
130,199 121,681
COST OF GOODS SOLD 177,205 45,030
GROSS MARGIN (47,006 ) 76,651
OPERATING EXPENSES
Research and development, net of government grant
proceeds of $0 and $29,886, respectively 61,748 26,329
Selling, general and administrative 403,349 1,023,687
TOTAL OPERATING EXPENSES 465,097 1,050,016
LOSS FROM OPERATIONS (512,103 ) (973,365 )
OTHER INCOME (EXPENSE)
Interest expense (686,176 ) (159,956 )
Change in fair value of derivative liabilities - 60,311
Gain on extinguishment of debt - 1,148,554
TOTAL OTHER INCOME (EXPENSE), NET (686,176 ) 1,048,909
NET INCOME (LOSS) $ (1,198,279 ) $ 75,544
NET INCOME (LOSS) PER COMMON SHARE, BASIC $ (0.12 ) $ 0.02
NET LOSS PER COMMON SHARE, DILUTED $ (0.12 ) $ (0.13 )
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC 9,717,827 3,691,248
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, DILUTED 9,717,827 16,964,471
Revenue
We generate our revenues primarily from the sale of our ConsERV cores and
systems and Aqualyte membrane. Product sales were $117,699 and $109,181 for the
three months ended June 30, 2022 and 2021, respectively, an increase of $8,518
or 8%. The increase in revenue was driven by a decrease in Aqualyte sales,
offset by an increase in ConsERV sales. We are focusing on creating sustainable
revenues with Aqualyte and ConsERV core and system sales with the expectation
that this will allow for growth in 2022 and beyond.
Revenues from royalty and license fees were $12,500 and $12,500 for the three
months ended June 30, 2022 and 2021, respectively.
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Cost of sales
Our cost of sales consists primarily of materials (including freight), direct
labor, and outsourced manufacturing expenses incurred to produce our ConsERV
cores and systems and Aqualyte nanomaterial. Cost of goods sold were $177,205
and $45,030 for the three months ended June 30, 2022 and 2021 respectively, an
increase of $132,175 or 294%. This reflects price increases throughout our
supply chain, general increases in labor costs, and labor costs recognized in
the second quarter of 2022 for products and services to be delivered in the
third quarter.
We are dependent on third parties to manufacture the key components needed for
our nano-structured based materials and some portion of the value-added products
made with these materials. Accordingly, a supplier's failure to supply
components in a timely manner, or to supply components that meet our quality,
quantity and cost requirements or technical specifications, or the inability to
obtain alternative sources of these components on a timely basis or on
acceptable terms, would create delays in production of our products and/or
increase the unit costs of production. Certain of the components or the
processes of our suppliers are proprietary. If we were ever required to replace
any of our suppliers, we should be able to obtain comparable components from
alternative suppliers at comparable costs, but this would create a delay in
production.
Gross margin
Gross loss from the sales of products was $47,006 for the three months ended
June 30, 2022 and gross margin was $76,651 for the three months ended June 30,
2021 representing negative 6% and 63% for the three months ended June 30, 2022
and 2021.
As we are actively monitoring our increases in production cost, we have raised
the prices for our ConsERV product line while continuing to work within our
supply chain to reduce these costs. Although our gross margin for the three
months ended June 30, 2022 is negative, we anticipate the revenues received from
products delivered in the third quarter will increase our gross margin, bringing
it positive again.
Research and development costs
Expenditures for research and development are expensed as incurred. We incurred
research and development costs of $61,748 and $56,215 for the three months ended
June 30, 2022 and 2021, an increase of $5,533 or 10%. We account for proceeds
received from government funding for research and development as a reduction in
research and development costs. We recorded proceeds against research and
development expenses on the Statements of Operations of $0 and $29,886 for the
three months ended June 30, 2022 and 2021, a decrease of $29,886 or 100%.
Variances in grant expenditures and reimbursements are due to an emphasis on
completing an existing Small Business Innovation Research (SBIR) Phase II grant.
This grant was completed in August 2021.
Selling, general and administrative expenses
Our selling, general and administrative expenses consist primarily of payroll
and related benefits, professional fees, marketing and channel support costs,
and other infrastructure costs such as insurance, information technology and
occupancy expenses. Selling, general and administrative expenses were $403,349
and $1,023,687 for the three months ended June 30, 2022 and 2021, a decrease of
$620,338 or 61%. This decrease is primarily due to stock based compensation
issued in the second quarter of 2021.
Our selling, general and administrative expenses may fluctuate due to a variety
of factors, including, but not limited to:
· Additional infrastructure needed to support the expanded commercialization
of our ConsERV and Aqualyte products and/or new product applications of
our polymer technology for, among other things, administrative personnel,
physical space, marketing and channel support and information technology;
· The issuance and recognition of expenses related to fair value of new
share-based awards, which is based on various assumptions including, among
other things, the volatility of our stock price; and
· Additional expenses because of being an SEC reporting company, including,
but not limited to, director and officer insurance, director fees, SEC
compliance expenses, transfer agent fees, additional staffing,
professional fees, and similar expenses.
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We continue to focus on decreasing selling, general and administrative expenses
for all our product efforts.
Other Income (Expense)
Other expense for the three months ended June 30, 2022 was $686,176 compared to
income of $1,048,909 for the three months ended June 30, 2021, a decrease of
$1,735,085 or 165%. The increased net other expense is primarily due to the lack
of income relating to the change in fair value of derivative liabilities and an
increased interest expense.
Net Income (Loss)
Net loss for the three months ending June 30, 2022 was $1,198,279 compared to an
income of $75,544 for the three months ended June 30, 2021. The increased loss
in the three months ended June 30, 2022 was primarily due to the increase in
other expense described above and negative gross margin.
Six Months Ended June 30, 2022 Compared to June 30, 2021
The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations:
For the Six Months Ended
June 30,
2022 2021
REVENUE
Sales $ 160,894 $ 171,990
Royalty and license fees 25,000 25,000
185,894 196,990
COST OF GOODS SOLD 229,645 82,890
GROSS MARGIN (43,751 ) 114,100
OPERATING EXPENSES
Research and development, net of government grant
proceeds of $0 and $60,966, respectively 126,621 39,846
Selling, general and administrative 828,625 1,285,074
TOTAL OPERATING EXPENSES 955,246 1,324,920
LOSS FROM OPERATIONS (998,997 ) (1,210,820 )
OTHER INCOME (EXPENSE)
Interest expense (1,281,812 ) (360,808 )
Change in fair value of derivative liabilities - 2,241,678
Gain on extinguishment of debt - 1,148,554
TOTAL OTHER INCOME (EXPENSE), NET (1,281,812 ) 3,029,424
NET INCOME (LOSS) $ (2,280,809 ) $ 1,818,604
NET INCOME (LOSS) PER COMMON SHARE, BASIC $ (0.24 ) $ 1.29
NET LOSS PER COMMON SHARE, DILUTED $ (0.24 ) $ (0.17 )
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING,
BASIC
9,567,149 1,994,429
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING,
DILUTED 9,567,149 278,128
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Revenue
We generate our revenues primarily from the sale of our ConsERV cores and
systems and Aqualyte membrane. Product sales were $160,894 and $171,990 for the
six months ended June 30, 2022 and 2021, respectively, a decrease of $11,096 or
6%. The decrease in revenue was driven by a decrease in Aqualyte sales, offset
by an increase in ConsERV sales. We are focusing on creating sustainable
revenues with Aqualyte and ConsERV core and system sales with the expectation
that this will allow for growth in 2022 and beyond.
Revenues from royalty and license fees were $25,000 and $25,000 for the six
months ended June 30, 2022 and 2021, respectively.
Cost of sales
Our cost of sales consists primarily of materials (including freight), direct
labor, and outsourced manufacturing expenses incurred to produce our ConsERV
cores and systems and Aqualyte nanomaterial. Cost of goods sold were $229,645
and $82,890 for the six months ended June 30, 2022 and 2021 respectively, an
increase of $146,755 or 177%. This reflects price increases throughout our
supply chain, general increases in labor costs, and labor costs recognized in
the second quarter of 2022 for products and services to be delivered in the
third quarter.
We are dependent on third parties to manufacture the key components needed for
our nano-structured based materials and some portion of the value-added products
made with these materials. Accordingly, a supplier's failure to supply
components in a timely manner, or to supply components that meet our quality,
quantity and cost requirements or technical specifications, or the inability to
obtain alternative sources of these components on a timely basis or on
acceptable terms, would create delays in production of our products and/or
increase the unit costs of production. Certain of the components or the
processes of our suppliers are proprietary. If we were ever required to replace
any of our suppliers, we should be able to obtain comparable components from
alternative suppliers at comparable costs, but this would create a delay in
production.
Gross margin
Gross loss from the sales of products was $43,751 for the six months ended June
30, 2022 and gross margin was $114,100 for the six months ended June 30, 2021
representing negative 23% and 58% for the six months ended June 30, 2022 and
2021.
As we are actively monitoring our increases in production cost, we have raised
the prices for our ConsERV product line while continuing to work within our
supply chain to reduce these costs. Although our gross margin for the six months
ended June 30, 2022 is negative, we anticipate the revenues received from
products delivered in the third quarter will increase our gross margin, bringing
it positive again.
Research and development costs
Expenditures for research and development are expensed as incurred. We incurred
research and development costs of $126,620 and $100,812 for the six months ended
June 30, 2022 and 2021, an increase of $25,808 or 26%. We account for proceeds
received from government funding for research and development as a reduction in
research and development costs. We recorded proceeds against research and
development expenses on the Statements of Operations of $0 and $60,966 for the
six months ended June 30, 2022 and 2021, a decrease of $60,966 or 100%.
Variances in grant expenditures and reimbursements are due to an emphasis on
completing an existing Small Business Innovation Research (SBIR) Phase II grant.
This grant was completed in August 2021.
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Selling, general and administrative expenses
Our selling, general and administrative expenses consist primarily of payroll
and related benefits, professional fees, marketing and channel support costs,
and other infrastructure costs such as insurance, information technology and
occupancy expenses. Selling, general and administrative expenses were $828,625
and $1,285,074 for the six months ended June 30, 2022 and 2021, a decrease of
$456,449 or 36%. This decrease is primarily due to stock based compensation
issued in the second quarter of 2021.
Our selling, general and administrative expenses may fluctuate due to a variety
of factors, including, but not limited to:
· Additional infrastructure needed to support the expanded commercialization
of our ConsERV and Aqualyte products and/or new product applications of
our polymer technology for, among other things, administrative personnel,
physical space, marketing and channel support and information technology;
· The issuance and recognition of expenses related to fair value of new
share-based awards, which is based on various assumptions including, among
other things, the volatility of our stock price; and
· Additional expenses because of being an SEC reporting company, including,
but not limited to, director and officer insurance, director fees, SEC
compliance expenses, transfer agent fees, additional staffing,
professional fees, and similar expenses.
We continue to focus on decreasing selling, general and administrative expenses
for all our product efforts.
Other Income (Expense)
Other expense for the six months ended June 30, 2022 was $1,281,812 compared to
income of $3,029,424 for the six months ended June 30, 2021, a decrease of
$4,311,236 or 142%. The increased net other expense is primarily due to the lack
of income relating to the change in fair value of derivative liabilities and an
increased interest expense.
Net Income (Loss)
Net loss for the six months ending June 30, 2022 was $2,280,809 compared to an
income of $1,818,604 for the six months ended June 30, 2021. The increased loss
in the six months ended June 30, 2022 was primarily due to the increase in other
expense described above and negative gross margin.
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Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred significant losses
since inception, incurred a loss of $2,280,809 for the six months ended June 30,
2022 and, as of June 30, 2022, the Company has an accumulated deficit of
$60,103,911, total stockholders' deficit of $10,428,954, negative working
capital of $10,351,150 and cash of $44,150. The Company used $991,845 and
$393,957 of cash in operations during the six months ended June 30, 2022 and
2021, respectively, which was funded primarily by proceeds from loans from
related parties and others. There is no assurance that any such financing will
be available in the future. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company is currently
pursuing the following sources of short and long-term working capital:
1. The Company is actively working with selected targeted parties who are
interested in licensing, purchasing the rights to, or establishing a joint
venture to commercialize applications of the Company's technology;
2. The Company continues to seek capital from certain strategic and/or
government grant opportunities and related sources. These sources may,
pursuant to any agreements that may be developed in conjunction with such
funding, assist in the product definition and design, roll-out and channel
penetration of products; and
3. The Company increased its value and potential to attract new investors
when it completed the exchange program of 'debt to equity' in the 2nd
quarter of 2021 clearing out all convertible debt in exchange for equity
at a fixed price at the end of the second quarter of 2021. This has helped
the Company attract growth capital it could not prior to this 'debt to
equity' exchange.
Management and the Board believe:
1. In the face of current world events (financial market see-sawing, war,
China slow-down, supply chain challenges, etc.) our products remain in
demand.
2. The Company's ability to raise new funds while improved by the solution of
the Company's previous convertible note matter and the uptick in new
orders for product, remains challenged. World events find varying degrees
of effect on the Company's going forward ability to raise reasonably
priced growth capital in the amount(s) required. This is a challenging
time to raise growth capital and become profitable.
3. We believe our current cash position, and our projected ability to attract
additional growth capital accelerating sustainable revenue generation
(cash flow) from operations and investments, is adequate through the end
of the third quarter 2022. At which time the combination of our progress
in the market, greater and stronger market validation of our industry
changing benefits, and cautiously optimistic optimism that the recent
downturn of the public markets worldwide will have turned, finding
additional growth capital will be in place.
4. The Company entered into a Loan and Security Agreement in June 2016
pursuant to which the Company issued a Senior Secured Promissory Note that
granting the Holder a secured interest in all the assets of the Company.
All Parties are working to resolve open issues in the late 3rd quarter or
early 4th quarter of 2022.
5. The supply chain impact of recent world events is affecting the Company's
ability to produce product for its customers. Inability to timely acquire
specified components may find the Company needing to redesign and
recertify its products, or to stop production until the supply chain
matter is resolved. In either event this will cause loss of sales revenue,
potentially key Dais team members, and customers. The Company has
successfully implemented several workarounds including sourcing 'similar
but when installed equal' components with new vendors to supply needed
components. Additionally, the Company is collaborating with its highest
profile suppliers to accelerate improved paths to minimize the impact of
this situation.
We believe the recurring Supply chain shortages, and the impact of the
inflationary spiral has and is impacting the Company's growth plans,
operations, revenues, and relationships with its customers. We have
experienced low staffing levels at vendors' companies, sudden cancellation
of long lead time, high value engineered components with no future
delivery times provided, rapid price increases in key commodity-like
components, and a significant hourly labor increase.
We believe this upward spiral of the costs, and uncertainty for costs and
delivery will continue to have an impact on the Company, and its customers
until at least the end of 2022.
Management has and continues to work to diversify existing, and new
partners, to identify multiple sources of materials and components, and to
create alternative solutions for customers. Increase crude oil prices
continue to influence the cost of resins, plastics, and fuel. Shipping and
trucking costs have increased, capacity has contracted, and shipping times
have increased. These issues are increasing costs across industries.
Management has adjusted prices and lead times and will continue to monitor
the situation.
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Any failure by us to timely procure additional financing or investment adequate
to fund the ongoing operations, including planned product development
initiatives and commercialization efforts, or experience a major supply chain
disruption will have material adverse consequences on our financial condition,
results of operations and cash flows as could any unfavorable terms. While we
believe the Company's prospects have improved for funding, there are no
assurances we will be able to obtain the financing and planned product
development commercialization, and the sales channel challenges continue to
mount. The Company may fail to reach an accord with the Senior Secured Note
Holder who has deep rights with the assets of the Company pledged as security
for repayment of the Note. Accordingly, we may not have the ability to continue
as a going concern. The financial statements of the Company do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary should we be unable to continue as a going concern.
Statement of Cash Flows
Cash as of June 30, 2022 was $44,150 compared to $773,423 as of December 31,
2021. Cash is primarily used to fund our working capital requirements.
Net cash used in operating activities was $991,845 for the six months ended June
30, 2022 compared to $393,957 for the same period in 2021. The increase in net
cash used was primarily due to an increase in net loss (after adjusting for
non-cash items) partially offset by an increase in cash from net working capital
accounts. For the six months ended June 30, 2022, net loss (after adjusting for
non-cash items) was $1,438,548. Accounts receivable, inventory and other assets
together increased by $197,495. Accounts payable, accrued liabilities, customer
deposits and deferred revenue increased in total by $644,198. For the six months
ended June 30, 2021, net loss (after adjusting for non-cash items) was $685,276.
Accounts receivable, inventory and other assets together increased by $64,756.
Accounts payable, accrued liabilities, customer deposits and deferred revenue
increased in total by $356,075.
Net cash used in investing activities was $37,428 for the six months ended June
30, 2022 compared to $12,064 for the same period in 2021, driven by an increase
in purchases of equipment.
Net cash provided by financing activities was $300,000 for the six months ended
June 30, 2022 compared to $458,437 for the same period in 2021. The decrease
resulted from a decrease in proceeds from notes payable and notes payable due to
related parties.
Financing and Capital Transactions
Paycheck Protection Program Loan
On January 25, 2021, the Company received $122,340 in a loan borrowed from a
bank pursuant to the Paycheck Protection Program under the CARES Act guaranteed
by the Small Business Administration ("SBA"), which we expect to be forgiven in
part or in full, subject to our compliance with the conditions of the Paycheck
Protection Program. If not forgiven, the terms on the note provide for interest
at 1% per year and the note mature in 24 months, with 18 monthly payments of
$8,146 beginning after the initial 6-month deferral period for payments. This
loan was subsequently forgiven in full on July 12, 2022.
On April 29, 2020, the Company received $144,750 in a loan borrowed from a bank
pursuant to the Paycheck Protection Program under the CARES Act guaranteed by
the Small Business Administration ("SBA"). This loan was subsequently forgiven
in full on August 29, 2021.
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Small Business Administration Loan
On June 12, 2020, the Company received $150,000 in a loan borrowed from the SBA.
Installment payments, including principal and interest, of $731 monthly, will
begin 12 months from the date of the note. The balance of principal and interest
will mature 30 years from the date of the note. Interest will accrue at the rate
of 3.75% per year. On March 15, 2022, the U.S. Small Business Administration
announced that the deferment period for the repayment would be extended to 30
months from the date of the note.
Related Party Note
On June 24, 2016, the Company entered into a Loan and Security Agreement
("Security Agreement") with the entity known as PKT Strategic Assets, LLC (the
"Holder") pursuant to which the Company issued a Senior Secured Promissory Note
for $150,000 (the "Note"). The Note has an interest rate is 12% per annum
compounded daily with a minimum interest payment of $2,000. The Note grants the
Holder a secured interest in all the assets of the Company. During 2016 to the
period ended June 30, 2022, the Holder extended the Note pursuant to various
amendments. Pursuant to the amendments, the principal amount and interest
totaled $4,532,333 (including fees and other expenses). The Holder's corporation
is controlled by Ms. Tangredi, related to Tim Tangredi: the Company's CEO and
stockholder, and therefore, is a Related Party of the Company. The Company is to
pay the Holder the principal, plus all interest and fees due in accordance with
terms and conditions of the Security Agreement on the earlier of: (i) the date
upon which the Company secures funds, regardless of source, equal to or
exceeding, in the aggregate, $1,000,000 or (ii.) November 1, 2021 which has
expired. The Holder has not declared the Note in Default as the Parties have
reached a tentative agreement to several issues including the extension of the
Maturity Date (the "Maturity Date"). The Parties are working to complete this
agreement during the third quarter of 2022. The Company has recorded interest
expense of $220,395 and $66,370 for the three-month periods ended June 30, 2022
and 2021, respectively and $369,461 and $130,353 for the six-month periods ended
June 30, 2022 and 2021, respectively. We made a payment of fees and accrued
interest totaling $154,398 during the six months ended June 30, 2022. Accrued
interest was $2,367,436 and $2,152,373 at June 30, 2022 and December 31, 2021,
respectively.
JMS Investments
Between April of 2021 and September 30, 2021, JMS Investments of Staten Island,
NY, USA invested $376,000 in seven separate transactions. The sums are repayable
in the form of one-year demand notes having an interest rate of 8.5%.
On August 30, 2021, the Company entered a promissory note with GEX Management,
Inc. The note matured on February 28, 2022 and bears interest at 10% per year.
The note was repaid in December 2021. In connection with this note, the Company
has agreed to issue 1,000,000 shares of common stock to the lender. These shares
have not been issued at June 30, 2022. The shares to be issued have been valued
at $120,990, which has been recorded as debt discount. The discount has been
fully amortized in 2021. The value of the shares has been included in accrued
expenses at December 31, 2021.
2022 Convertible Notes
On June 15, 2022, the Company entered into two convertible promissory notes
aggregating $300,000. The notes mature on the earlier of December 15, 2022 or 10
days after demand and bear interest at 8% per year. The Company received
proceeds of $300,000. The notes are convertible into shares of common stock at a
fixed conversion price of $0.30 per share. The Company has recorded debt
discount of $200,000, related to the beneficial conversion feature of the notes.
The discount will be amortized to interest expense over the six-month term of
the notes, and $17,486 was amortized during the three and six months ended June
30, 2022.
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2021 Convertible Notes
On September 20, 2021, the Company entered a convertible promissory note with GS
Capital Partners, LLC. The note matures on September 20, 2022 and bears interest
at 8% per year. The Company received proceeds of $197,000, after deduction of
$20,000 of original issue discount and $3,000 of costs. In connection with this
note, the Company has issued a warrant to purchase 1,466,666 shares of common
stock to the lender. The warrant has an exercise price of $0.15 per share and
expires on September 21, 2026. The relative fair value of the warrant was
$110,000, determined using the Black Scholes Model with the following
assumptions: (1) risk free interest rate of 0.84%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of the Company's common stock of
389%; and (4) an expected life of 5 years. The note is convertible into shares
of common stock at a fixed conversion price of $0.10 per share. The company has
recorded a beneficial conversion feature of $90,000. Amortization of discount
and costs was $55,597 and $110,584 for the three and six months ended June 30,
2022, respectively.
During the fourth quarter of 2021, the Company entered into twenty convertible
promissory notes with various holders aggregating $1,412,000. The notes mature
one year from issuance and bear interest at 8% per year. The Company received
proceeds of $1,287,000, after deduction of $117,000 of original issue discount
and $8,000 of costs. In connection with the notes, the Company has issued
warrants to purchase 10,463,332 shares of common stock to the lenders. The
warrants have an exercise price of $0.15 per share and expire five years from
the date of issuance. The relative fair value of the warrants was $1,366,127,
determined using the Black Scholes Model with the following assumptions: (1)
risk free interest rate of 0.84% - 1.33%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of the Company's common stock of
386% - 389%; and (4) an expected life of 5 years. The notes are convertible into
shares of common stock at a fixed conversion price of $0.10 per share. A total
of $1,412,000 has been recorded as debt discount, and 8,000 has been recorded as
deferred debt costs. The discount and costs will be amortized to interest
expense over the term of the notes Amortization of discount and costs was
$349,355 and $699,492 for the three and six months ended June 30, 2022,
respectively.
During May 2022, the Company issued 457,500 shares of common stock upon the
conversion of $45,000 of notes payable, plus $750 of costs. Unamortized discount
and debt costs related to the principal converted were $21,206 and $514,
respectively, which were charged against paid in capital upon conversion.
The sums advanced by GS Capital Partners and JMS Investments together form a
"bridge loan" for use by the Company to, among other actions, bring all filings
current to return to fully reporting status with the SEC and OTC, and allow the
Company to obtain the critical resources which allow Dais to grow as management
and the bridge investors believe is possible using the company's proven
nanotechnology in sustainable product in a worldwide market. Currently, JMS
Investments, the Company, and the Senior Secured Note Holder are negotiating the
definitive investment plan along with terms and uses of proceeds. It is expected
the full investment plan will be ready for announcement in the third quarter of
2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, sales or expenses, results of operations, liquidity or
capital expenditures, or capital resources that are material to an investment in
our securities.
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