Amesite
Inc.
Notes
to Condensed Financial Statements
September 30, 2022 and 2021
Note 1 - Nature of Business and Liquidity
Amesite Inc. (the “Company”)
was incorporated in November 2017. The Company is an artificial intelligence driven platform and course designer, that provides customized,
high performance and scalable online products for schools and businesses. The Company uses machine learning to provide a novel, mass customized
experience to learners. The Company’s customers are businesses, universities and colleges, and K-12 schools. The Company’s
activities are subject to significant risks and uncertainties. The Company’s operations are considered to be in one segment.
On September 18, 2020, we consummated
a reorganizational merger, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated July 14, 2020 (“Effective
Date”), whereby we merged with and into Amesite Inc. (“Amesite Parent”) our former parent corporation, with our Company
resulting as the surviving entity. In connection with the same, we filed a Certificate of Ownership and Merger with the Secretary of State
of the State of Delaware, and changed our name from “Amesite Operating Company” to “Amesite Inc.” The stockholders
of Amesite Parent approved the Merger Agreement on August 4, 2020. The directors and officers of Amesite Parent became our directors and
officers.
Pursuant to the Merger Agreement, on
the Effective Date, each share of the Amesite parent’s common stock, $0.0001 par value per share, issued and outstanding immediately
before the Effective Date, was converted, on a one-for-one basis, into shares of our common stock.
Additionally, each option or warrant
to acquire shares of Amesite Parent outstanding immediately before the Effective Date was converted into and became an equivalent option
to acquire shares of our common stock, upon the same terms and conditions.
Going Concern
The accompanying condensed financial
statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business.
The
Company is developing its customer base and has not completed its efforts to establish a stabilized source of revenue sufficient to cover
its expenses. The Company has had a history of net losses and negative cash flows from operating activities since inception and expects
to continue to incur net losses and use cash in its operations in the foreseeable future.
In
addition, the Company has received a notice from the Nasdaq related to their failure to maintain a minimum bid price of $1 per share.
The Company is not currently in compliance with the Nasdaq listing rules and if the Company does not regain compliance by March 6, 2023,
the common stock of the Company will become subject to delisting. If the Company’s common stock is delisted, it may affect the Company’s
ability to obtain financing, trade or sell shares of their common stock, and/or forecasted operations could be negatively impacted in
an amount that the Company cannot currently quantify.
The assessment of the Company’s
ability to meet its future obligations is inherently judgmental, subjective and susceptible to change. Based
on their current forecast, management believes that it will have sufficient cash and cash equivalents to maintain the Company’s
planned operations for the next twelve months following the issuance of these financial statements; however, there is uncertainty in the
forecast and therefore the Company cannot assert that it is probable. The Company has considered both quantitative and qualitative factors
that are known or reasonably knowable as of the date of these financial statements are issued and concluded that there are conditions
present in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern.
In
response to the conditions, management plans include generating cash by completing financing transactions, which may include offerings
of common stock. However, these plans are subject to market conditions, and are not within the Company’s control, and therefore,
cannot be deemed probable. There is no assurance that the Company will be successful in implementing their plans. As a result, the Company
has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going
concern.
The condensed financial statements do
not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Note 2 - Significant Accounting Policies
Basis of Presentation
The condensed financial statements of
the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and considering the requirements of the United States Securities and Exchange Commission (“SEC”). The Company has a fiscal
year with a June 30 year end.
In the opinion of management, the condensed
financial statements of the Company as of September 30, 2022 and 2021 and for the three months ended September 30, 2022 and 2021 include
all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of
the results for the interim periods. These interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed in or omitted from this report pursuant
to the rules and regulations of the SEC. These financial statements should be read together with the condensed financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022.
Capitalized Software Costs
The Company capitalizes costs incurred
in the development of software for internal use, including the costs of the software, materials, consultants, and payroll and payroll
related costs for employees incurred in developing internal use computer software. Planning costs incurred prior to the development of
software and costs not qualifying for capitalization are charged to expense. The Company amortizes capitalized software over a period
of three years, which is the expected useful life of the software.
The Company recognized amortization
expense of approximately $180,659 and $208,000 for the three months ended September 30, 2022 and 2021, respectively. Accumulated amortization
on September 30, 2022 and 2021 was $2,364,068 and $1,545,483, respectively.
Revenue Recognition
We generate substantially all of our
revenue from contractual arrangements with businesses, colleges and universities to provide a comprehensive platform of integrated technology
and technology enabled services related to product offerings. During the three months ended September
30, 2022 and 2021, we recognized revenue from contracts with customers of $280,282 and $140,691, respectively, related to services
provided over time.
Performance Obligations and Timing
of Recognition
A performance obligation is a promise
in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
We derive revenue from annual licensing
arrangements, including maintenance fees, setup fees and other variable fees for course development and miscellaneous items. Our contracts
with partners generally have two-year terms and have a single performance obligation. The promises to set up and provide a hosted platform
of tightly integrated technology and services partners needed to attract, enroll, educate, and support students are not distinct within
the context of the contracts. This performance obligation is satisfied as the partners receive and consume benefits, which occurs ratably
over the contract term.
Occasionally, we will provide professional
services, such as custom development, non-complex implementation activities, training, and other various professional services. We evaluate
these services to determine if they are distinct and separately identifiable in the context of the contract. In our contracts with customers
that contain multiple performance obligations because of this assessment, we allocate the transaction price to each separate performance
obligation on a relative standalone selling price basis. Standalone selling prices of our solutions and services are typically estimated
based on observable transactions when the solutions or services are sold on a standalone basis. When standalone selling prices are not
observable, we utilize a cost-plus margin approach to allocate the transaction price.
We do not disclose the value of unsatisfied
performance obligations because the consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms
part of a single performance obligation (i.e., consideration received is based on the level of product offerings, which is unknown in
advance). During the three months ended September 30, 2022, four customers comprised approximately 73% of total revenue. During the three
months ended September 30, 2021, three customers comprised of approximately 86% of total revenue.
We also receive fees that are fixed
in nature, such as annual license and maintenance charges. The fees are independent of the number of students that are enrolled in courses
with our customers and are allocated to and recognized ratably over the service period of the contract that the Company’s platform
is made available to the customer (i.e., the customer simultaneously receives and consumes the benefit of the software over the contract
service period).
The following factors affect the nature,
amount, timing, and uncertainty of our revenue and cash flows:
|
● |
The majority of our customers are private and public learning institutions across various domestic regions |
|
● |
The majority of our customers have annual payment terms |
The following table shows revenue from
contracts with customers by customer type for the three months ended September 30, 2022 and 2021, respectively.
| |
Three Months
Ended | |
Customer Type | |
September
30,
2022 | | |
September
30,
2021 | |
Enterprise | |
$ | 198,893 | | |
$ | 105,666 | |
University | |
| 81,389 | | |
| 30,025 | |
K-12 | |
| - | | |
| 5,000 | |
Total | |
$ | 280,282 | | |
$ | 140,691 | |
Accounts Receivable, Contract Assets
and Liabilities
Balance sheet items related to contracts
consist of accounts receivable (net) and contract liabilities on our condensed balance sheets. Accounts receivable (net) is stated at
net realizable value, and we utilize the allowance method to provide for doubtful accounts based on management’s evaluation of the
collectability of the amounts due. Our estimates are reviewed and revised periodically based on historical collection experience and a
review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly
differed from prior estimates. There was no allowance for doubtful accounts on accounts receivable balances as of September 30, 2022 or June
30, 2022.
We may recognize revenue prior to billing
a customer when we have satisfied or partially satisfied our performance obligations as billings to our customers may not be made until
after the service period has commenced. As of September 30, 2022 and June 30, 2022, we do not have any contract assets.
Contract liabilities as of each balance
sheet date represent the excess of amounts billed or received as compared to amounts recognized in revenue on our condensed statements
of operations as of the end of the reporting period, and such amounts are reflected as a current liability on our condensed balance sheets
as deferred revenue. We generally receive payments prior to completion of the service period and our performance obligations. These payments
are recorded as deferred revenue until the services are delivered or until our obligations are otherwise met, at which time revenue is
recognized.
Some contracts also involve annual license
fees, for which upfront amounts are received from customers. In these contracts, the license fees received in advance of the platform’s
launch are recorded as contract liabilities.
The following table provides information
on the changes in the balance of contract liabilities for the three months ended September 30:
| |
2022 | | |
2021 | |
Opening balance | |
$ | 342,672 | | |
$ | 333,200 | |
Billings | |
| 216,500 | | |
| 216,806 | |
Less revenue recognized from continuing operations: | |
| (217,502 | ) | |
| (140,691 | ) |
Closing balance | |
$ | 341,670 | | |
$ | 409,314 | |
Revenue recognized during the three
months ended September 30, 2022 and 2021 that was included in the deferred revenue balance that existed in the opening balance of each
year was approximately $175,000 and $98,000, respectively.
The deferred revenue balance as of September
30, 2022 is expected to be recognized over the next 12 months.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss for
the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is calculated by
dividing the net loss for the period by the weighted-average number of common shares outstanding during the period, increased by potentially
dilutive common shares (“dilutive securities”) that were outstanding during the period. Dilutive securities include stock
options and warrants granted, convertible debt, and convertible preferred stock. There were 8,928,174 and 4,421,364
potentially dilutive securities for the three months ended September 30, 2022 and 2021, respectively.
Risks and Uncertainties
The Company operates in an industry
subject to rapid change. The Company’s operations will be subject to significant risk and uncertainties including financial, operational,
technological, and other risks associated with an early-stage company, including the potential risk of business failure.
On March 11, 2020, the World Health
Organization declared the outbreak of a respiratory disease caused by a novel coronavirus as a “pandemic.” First identified
in late 2019 and known now as COVID-19, the outbreak has impacted thousands of individuals worldwide. In response, many countries, including
the United States, have implemented measures to combat the outbreak which have impacted global business operations. While management believes
the Company’s operations have not been significantly impacted, the Company continues to monitor the situation. In addition, while
the Company’s results of operations, cash flows and financial condition could be negatively impacted, the extent of the impact cannot
be reasonably estimated at this time.
Note 3 - Stock-Based Compensation
The Company’s Equity Incentive
Plan (the “Plan”) permits the grant of stock options, stock appreciation rights, restricted stock, or restricted stock units
to officers, employees, directors, consultants, agents, and independent contractors of the Company. The Company believes that such awards
better align the interests of its employees, directors, and consultants with those of its stockholders. Option awards are generally granted
with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest
over two years from the grant date and generally have ten-year contractual terms. Certain option awards provide for accelerated vesting
(as defined in the Plan).
The Company has reserved 4,600,000 shares
of common stock to be available for granting under the Plan.
The Company estimates the fair
value of each option award using a Black Scholes Model (“BSM”) that uses the weighted average assumptions included in the
table below. Expected volatilities used in the BSM assumptions are based on historical volatility of the Company’s stock prices.
The expected term of stock options granted has been estimated using the simplified method because
the Company is generally unable to rely on its limited historical exercise data or alternative information as a reasonable basis upon
which to estimate the expected term of such options. The risk-free rate for periods within the contractual life of the option
is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid any dividends on common stock since
its inception and does not anticipate paying dividends on its common stock in the foreseeable future. When calculating the amount of
annual compensation expense, the Company has elected not to estimate forfeitures and instead accounts for forfeitures as they occur.
Accordingly, $30,953 was reversed related to forfeited options for the three months ended September 30, 2022. There were
no forfeited options for the three months ended September 30, 2021.
A summary of option activity for the
three months ended September 30, 2022 is presented below:
Options | |
Number of Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (in years) | |
Outstanding at July 1, 2022 | |
| 3,163,190 | | |
$ | 1.89 | | |
| 7.34 | |
Granted | |
| - | | |
| - | | |
| - | |
Terminated | |
| (47,667 | ) | |
| 2.84 | | |
| 8.55 | |
Outstanding and expected to vest at September 30, 2022 | |
| 3,115,523 | | |
| 1.88 | | |
| 7.07 | |
During the quarter ended September 30,
2022, no options were issued and 47,667 options were terminated.
For the three months ended September
30, 2022 and 2021, the Company recognized $175,779 and $389,085, in expense related to the Plan, respectively.
On September 28, 2021, the Board approved
certain stock awards to its board members in the form of stock options and restricted stock. The stock option awards and restricted stock
awards are expected to vest ratably over a twelve-month period. The total approved compensation was $172,702 in stock options and $600,000
in restricted stock. The number of options was determined based on the fair value of the Company’s share price as of the date of
grant. The Company determined that there will be 337,078 of restricted shares issued upon vesting, based on the fair value of the Company’s
share price on the grant date. On September 28, 2022, the restricted shares became fully vested and are expected to be issued in the near
term.
Accordingly, $42,200 related to the
stock option grants made to the board members, was recognized as stock-based compensation expense for the three months ended September
30, 2022. The Company also recognized $150,000 as stock-based compensation expense related to the restricted stock unit grants made to
the board members for the three months ended September 30, 2022, respectively. The cost related to the grants made to board members is
expected to be recognized through September of 2022.
As of September 30, 2022, there was
approximately $171,964 of total unrecognized compensation cost for employees and non-employees related to nonvested options. These costs
are expected to be recognized through March 2026.
Note 4 - Common Stock
On August 2, 2021, the Company entered
into a purchase agreement (the “Purchase Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), under
which, subject to specified terms and conditions, the Company may sell to Lincoln Park up to $16.5 million worth of common stock, par
value $0.0001 per share, from time to time during the term of the Purchase Agreement, which ends August 2, 2023.
In connection with the Purchase Agreement,
the Company entered into an introducing broker agreement with Laidlaw & Company (UK) Ltd. (“Laidlaw”), pursuant to which
the Company agreed to pay a cash fee to Laidlaw (the “Introductory Fee”) equal to (i) 8% of the amount of the Initial Purchase,
(ii) 8% of the amount of a one-time share request up to $1,000,000 (“Tranche Purchase”), if any, and (iii) 4% of up to the
next $13,500,000 (or up to $14,500,000 if the Tranche Purchase is not exercised).
Upon entering into the Purchase Agreement,
the Company sold 759,109 shares of common stock to Lincoln Park as an initial purchase for a total purchase price of $1,500,000 (the “Initial
Purchase”). The Company received net proceeds from the Initial Purchase of $1,360,000 after the payment of the Introductory Fee
and offering costs. As consideration for Lincoln Park’s commitment to purchase up to $16.5 million of shares of common stock under
the Purchase Agreement, the Company issued 152,715 shares of common stock to Lincoln Park. If Lincoln Park is requested to purchase additional
shares during the term of the Purchase Agreement, the requested shares, (“Regular Purchase”), are limited based on the current
share price of the Company’s common stock. If the average price is below $3.00 per share, the Company is limited to issuing 50,000
shares per request; if the share price is between $3.00 and $4.00 per share, the limit is 75,000 shares per request, if the share price
is between $4.00 and $5.00, the limit is 100,000 shares per request, and if the share price is above $5.00, the limit is 150,000 shares
per request. Requests for purchases are permitted daily as long as the Company’s stock price is above $0.50 per share. The price
for such regular purchases will be the lower of: (i) the lowest closing price of the Company’s common stock on the purchase date
for such Regular Purchase and (ii) the arithmetic average of the three (3) lowest closing prices of the Company’s common stock during
the ten (10) consecutive business days immediately preceding. Additionally, the Company may instruct Lincoln Park to purchase additional
shares of common stock that exceed the Regular Purchase limits (“Accelerated Purchase”). If the Company requests Lincoln Park
to make an Accelerated Purchase, the price per share is discounted from average historical closing prices. No additional shares were sold
to Lincoln Park through September 30, 2022.
The Company evaluated the contract that
includes the right to require Lincoln Park to purchase additional shares of common stock in the future (“put right”) considering
the guidance in ASC 815-40, “Derivatives and Hedging - Contracts on an Entity’s Own Equity” (“ASC 815-40”)
and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value
accounting. The Company has analyzed the terms of the put right and has concluded that it has no value as of September 30, 2022.
On October 19, 2021 and December 2,
2021, the Company issued 9,901 shares of its common stock totaling approximately $18,218 and 4,000 shares of its common stock totaling
approximately $4,480 in value, respectively, to various consulting firms in exchange for strategic investor relations services. These
shares vested immediately upon issuance. During the fourth quarter of fiscal year 2022, the Company issued 250,000 of its common stock
totaling approximately $126,250 in value, respectively, to a consulting firm in exchange for strategic advisory and digital marketing
services. These shares vested immediately upon issuance.
On February 11, 2022, the Company entered
into an underwriting agreement with Laidlaw, as representative of the several underwriters, to issue and sell up to 3,437,500 shares of
the Company’s common stock, at a public offering price of $0.80 per share. On February 14, 2022, the Company entered into an amended
and restated underwriting agreement in order to increase the number of shares sold in the offering to 3,750,000. On February 16, 2022,
the Company closed the offering, and sold 3,750,000 shares of common stock to Laidlaw for total gross proceeds of $3,000,000.
After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $2,509,550. In connection
with the offering, the Company issued five (5) year warrants to the underwriter to purchase 187,500 common shares at an exercise price
of $1.00.
The Company measures the warrants using
the BSM to estimate their fair value. The fair value of the warrants issued in connection with the offering was approximately $94,165
based on the following inputs and assumptions using the BSM: (i) expected stock price volatility of 80.10%; (ii) risk free interest rate
of 1.63%; and (iii) expected life of the warrants of 5 years. The warrants were fully vested on the date of grant and are included in
offering costs.
On
July 12, 2022, the Company issued 125,000 of its common stock totaling $61,250 in value to a consulting firm in exchange
for strategic advisory and digital marketing services. These shares vested immediately upon issuance.
On September 1, 2022, the Company
sold 4,181,821 shares of common stock for approximately $1.85 million, net of financing fees and expenses, and in a concurrent
private placement, warrants to purchase an aggregate of 4,181,821 shares of common stock at an exercise price of $0.82 per share. The fair value of the warrants issued was approximately $953,460 based on the following
inputs and assumptions using the BSM: (i) expected stock price volatility of 94.90%; (ii) risk free interest rate of 3.54%; and (iii)
expected life of the warrants of 5.5 years.
In
connection with the offering, the Company issued five (5) year warrants to the underwriter to
purchase 209,091 shares of common stock at an exercise price of $1.025 per share. The fair value of the warrants
issued in connection with the offering was approximately $42,454 based on the following inputs and assumptions using the BSM: (i)
expected stock price volatility of 94.90%; (ii) risk free interest rate of 3.54%; and (iii) expected life of the warrants of 5
years. The warrants were fully vested on the date of grant and are included in offering costs.
Note 5 - Income Taxes
For the three months ended September 30, 2022 and prior periods
since inception, the Company's activities have not generated taxable income or tax liabilities. Accordingly, the Company has not recognized
an income tax benefit for the three-month periods ended September 30, 2022 and 2021.
The Company has approximately $30.8 million
of net operating loss carryforwards for federal and $30.8 million for state, available to reduce future income taxes. Of the $30.8 million
of federal net operating losses, approximately $17,000 will expire in 2037 and the balance can be utilized indefinitely but will
be limited to 80% utilization. The state net operating losses will begin to expire in 2027. Due to uncertainty as to the realization
of the net operating loss carryforwards and other deferred tax assets as a result of the Company’s limited operating history and
operating losses since inception, a full valuation allowance has been recorded against the Company’s deferred tax assets. The Company
does not have any uncertain tax positions. The net operating loss carryforwards may be subject to an annual limitation as a result of
a change of ownership as defined under Internal Revenue Code Section 382. Tax years 2019-2022 remain open to examination for federal income
tax purposes and by other major taxing jurisdictions to which the Company is subject.
Note 6 - Subsequent Events
The Company has evaluated subsequent
events through the date of filing this Quarterly Report on Form 10-Q and determined that no material events occurred.