Notes to Financial Statements
Years Ended December 31, 2021 and 2020
Note 1. Background Information
Dais Corporation (“Dais”, “us,” “we,”, the “Company”), a New York corporation, is a nano-structured polymer technology materials company having developed and now commercializing products using its family of nanomaterial called Aqualyte. The first commercial product is called ConsERV, a fixed plate energy recovery ventilator which we believe 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. The second commercial product is NanoClear, a water clean-up process useful in the creation of potable water from most forms of contaminated water including industrial process wastewater (petrochemical, steel, etc.) sea, brackish, or wastewater. We continue to develop other nano-structured polymer technology applications in a variety of markets. The Company was incorporated in April 1993 and its corporate headquarters is in Odessa, Florida.
The Company is dependent on third parties to manufacture the key components needed for its nanostructured materials and some portion 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.
Note 2. Going Concern and Management’s Plans
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2021, the Company generated a net loss of $849,039 and has incurred significant losses since inception. As of December 31, 2021, the Company has an accumulated deficit of $57,823,102, total stockholders’ deficit of $8,372,175, negative working capital of $8,270,892 and cash and cash equivalents of $773,423. The Company used $1,283,772 and $556,423 of cash for operations during the years ended December 31, 2021 and 2020, 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, has 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.
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 December 31, 2021 and 2020, which is included in accrued expenses, other.
Royalty revenue is recognized as earned. The Company recognized royalty revenue of $0 for the years ended December 31, 2021 and 2020. 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 $50,000 for each of the years ended December 31, 2021 and 2020.
The Company accounts for revenue arrangements with multiple elements under the provisions of the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Topic 605-25, “Revenue Recognition-Multiple-Element Arrangements.” In order 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 $483,000 and $0 at December 31, 2021 and 2020, respectively. The Company has never experienced any losses related to these balances. The Company had no cash equivalents at December 31, 2021 or 2020.
Accounts receivable - Accounts receivable consist primarily of receivables from the sale of the Company’s ERV products and royalties due under license and supply agreements. The Company regularly reviews accounts receivable for any bad debts based on an analysis of the Company’s collection experience, customer credit worthiness and current economic trends. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on management’s review of accounts receivable, no allowance for doubtful accounts was deemed necessary at December 31, 2021 and 2020, respectively.
Concentrations - At December 31, 2021, two customers accounted for 100% of accounts receivable. For the year ended December 31, 2021, three customers accounted for 73% of total revenue. For the year ended December 31, 2020, three customers accounted for 63% of total revenue.
Other receivables - Other receivables consist primarily of receivables from the U.S. Department of Defense (See Note 3 - Research and development expenses and funding proceeds). The Company prepares invoices as it meets funding program milestones. Based on management’s review of other receivables, management has determined that no allowance for other receivables is necessary at December 31, 2021 and 2020.
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 December 31, 2021 and 2020 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 December 31, 2021 and 2020, the Company had $59,631 and $48,734 of raw materials, $1,844 and $4,843 of in-process inventory and $10,592 and $12,079 of finished goods inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is recorded at December 31, 2021 and 2020, 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 and amortization expense were $2,689 and $26,456 for the years ended December 31, 2021 and 2020, 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 2021 or 2020.
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 $18,885 and $17,637 for the years ended December 31, 2021 and 2020, 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.
Long-lived assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company estimates the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the asset values are recoverable. The Company did not recognize impairment on its long-lived assets during the years ended December 31, 2021 or 2020.
Government Funding - Government funding represents grants from the U.S. Department of Defense and are recognized when there is reasonable assurance that the funding will be received, and conditions associated with the funding are met. When funding’s are received related to property and equipment, the Company reduces the basis of the assets on the balance sheet, resulting in lower depreciation expense over the life of the associated asset. When funding’s are received which relate to expense reimbursement they are recorded as a reduction of the associated expense in the period in which the expense is incurred.
Research and development expenses and funding proceeds - Expenditures for research, development and engineering of products are expensed as incurred. The Company incurred research and development costs of $223,425 and $221,700 for the years ended December 31, 2021 and 2020, respectively. The Company accounts for proceeds received from government funding’s 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 $89,617 and $123,055 for the years ended December 31, 2021 and 2020, respectively.
Stock issuance costs - Stock issuance costs are recorded as a reduction of the related proceeds through a charge to stockholders’ deficit.
Common stock - The Company records common stock issuances when all the legal requirements for the issuance of such common stock have been satisfied.
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.
Warranties - The Company offers a limited warranty generally ranging from one to three years, A provision for product warranties has been recorded at December 31, 2021 and 2020. The Company has not incurred any warranty expense in either 2021 or 2020.
Stock based compensation - The Company recognizes all share-based payments to employees, including grants of employee stock options, as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period) or immediately if the share-based payments vest immediately.
There were no grants in 2021 or 2020.
Fair Value Measurements - The Company accounts for financial instruments in accordance with FASB Accounting Standards Codification (ASC) 820 “Fair value Measurement and Disclosures” (ASC 820). 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. |
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| · | 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. |
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| · | Level 3 - Inputs that are both significant to the fair value measurement and unobservable. |
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company has recorded a derivative liability for its convertible notes which contain variable conversion prices. The table below summarizes the fair values of our financial liabilities as of December 31, 2021 and 2020:
| | Fair Value at December 31, | | | Fair Value Measurement Using | |
| | 2021 | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | |
Derivative liability | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | Fair Value at December 31, | | | Fair Value Measurement Using | |
| | 2020 | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | |
Derivative liability | | $ | 3,845,662 | | | $ | - | | | $ | - | | | $ | 3,845,662 | |
The reconciliation of the derivative liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows for the years ended December 31, 2021 and 2020:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Balance, beginning of year | | $ | 3,845,662 | | | $ | 2,349,471 | |
Additions | | | 124,290 | | | | 556,727 | |
Extinguished derivative liability | | | (1,728,274 | ) | | | - | |
Change in fair value of derivative liabilities | | | (2,241,678 | ) | | | 939,464 | |
| | $ | - | | | $ | 3,845,662 | |
Income taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s 2017 through 2020 tax years remain open and subject to examination by the Internal Revenue Service.
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 income (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 and upon the conversion of notes. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. Common share equivalents of 32,526,731 and 15,365,623 were excluded from the computation of diluted earnings per share for the years ended December 31, 2021 and 2020, respectively, because their effect is anti-dilutive.
Recent Accounting Pronouncements - There are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective as follows:
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2019-12 did not have a material impact on our financial statements.
Other 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. Property and Equipment
Property and equipment consist of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
Furniture and fixtures | | $ | 20,966 | | | $ | 20,966 | |
Computer equipment and software | | | 21,761 | | | | 21,761 | |
Demonstration equipment | | | 92,733 | | | | 92,733 | |
Office and lab equipment | | | 295,987 | | | | 307,899 | |
Leasehold improvements | | | 14,808 | | | | 14,808 | |
Property and equipment, gross | | | 446,255 | | | | 458,167 | |
Less accumulated depreciation | | | 432,902 | | | | 453,666 | |
Property and equipment, net | | $ | 13,353 | | | $ | 4,501 | |
Note 5. Accrued Expenses, Other
Accrued expenses, other consists of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
Accrued expenses, other | | $ | 274,146 | | | $ | 185,656 | |
Accrued interest | | | 2,197,577 | | | | 1,238,553 | |
Accrued warranty costs | | | 91,531 | | | | 91,531 | |
| | $ | 2,945,918 | | | $ | 1,515,740 | |
Note 6. 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 (including property tax charges) related to this lease of $58,015 and $57,946 for the years ended December 31, 2021 and 2020, respectively. The lease term will terminate upon 30 days’ written notice from landlord or 90 days written termination from us.
The Company has accrued compensation due to the Chief Executive Officer as of December 31, 2021 and 2020 of $2,071,380 and $1,983,639, 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 now 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 December 31, 2021, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount and interest totaled $4,317,270 (including fees and other expenses). The Holder’s corporation is majority 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 are actively renegotiating a new Maturity Date (the “Maturity Date”) with changes terms and conditions. The Parties fully expect to come to reasonable terms on all issues during the first quarter of 2022. The Company has recorded interest expense of $1,473,884 and $234,163 for the years ended December 31, 2021 and 2020, respectively. Accrued interest was $2,152,373 and $678,489 at December 31, 2021 and 2020, respectively.
During May 2019 Dais Holdings Corp. (Dais Holdings”) was formed in Vancouver, B.C. and is wholly owned by our Chief Executive Officer. Dais Holdings’ purpose is to facilitate debt financing in Europe. The intent is for Dais Holdings to enter into the debt transactions. It will then immediately loan any proceeds received to the Company on the same or similar terms as the European debt. To date, Dais Holdings has not entered any transactions and Dais Corporation has not received any funding from Dais Holdings. The Company has paid the professional and other fees for setting up the Dais Holdings structure, aggregating $150,000. Ultimately, Dais Corporation will benefit from the Dais Holdings capital raise activities, and therefore has borne the cost. The costs have been expensed as incurred.
On October 12, 2019, the Company entered into 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 matures on October 12, 2021. Interest expense on the note was $600 for each of the years ended December 31, 2021 and 2020. Accrued interest was $1,350 and $750 at December 31, 2021 and 2020, respectively.
On February 27, 2015, the Company, and Tim N. Tangredi, the Company’s Chief Executive Officer entered into 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 7. Equity Transactions
Preferred Stock
On December 31, 2021 and 2020, 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 has 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 has been designated as Class B 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. 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.
Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Class A or Class B Preferred Stock unless, prior thereto, the holders of shares of Class A or Class B Preferred Stock shall have received $1.50 per share (the “Stated Amount”). The Class A and Class B Preferred Stock shall rank, with respect to the payment of liquidation, dividends and the distribution of assets, senior to the Company’s Common Stock.
The Holder (as defined in the Class A Preferred Stock certificate of designations) of the Class A Preferred Stock may convert all or part of the outstanding and unpaid Stated Amount (as defined in the Class A Preferred Stock certificate of designations) into fully paid and non-assessable shares of the Company’s common stock at the Conversion Price (as defined in the Class A Preferred Stock certificate of designations). The number of shares receivable upon conversion equals the Stated Amount divided by the Conversion Price. The Conversion Price shall be equal to the 75% of the average closing price for the 30 trading days prior to the election to convert. At no time will the Company convert any of the Stated Amount into common stock if that would result in the Holder beneficially owning more than 49% of the sum of the voting power of the Company’s outstanding shares of common stock plus the voting power of the Class A Preferred Stock. No shares of Class A Preferred Stock have been issued.
The shares of the Class B Preferred Stock shall be automatically redeemed by the Company at $0.01 per share on the date that Tim N. Tangredi ceases, for any reason, to serve as an officer, director, or consultant of the Company.
Common Stock
At December 31, 2021 and 2020, the Company’s Board of Directors has authorized 1,100,000,000 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.
2021 Transactions:
During the year ended December 31, 2021, the Company issued 7,036,668 shares of common stock and 2,826,733 common stock purchase warrants in settlement of convertible notes payable and related accrued interest. The shares are valued at $1,829,534 and the warrants are valued at $857,600.
During the year ended December 31, 2021, the Company issued 2,100,000 shares of common stock, valued at $567,000, for services.
2020 Transactions:
There were no common stock transactions in 2020.
Options and Warrants
In January 2021, outstanding Options and Warrants held by Employees, Board Members and the Company’s Secured Note Holder were surrendered by Holders to the Company.
The 3,576,733 warrants issued in 2021 in connection with the settlement of debt described in Note 9 have an exercise price of $0.30 per share and expire on June 30, 2022. The fair value of the warrants was $857,600, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.05%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 367%; and (4) an expected life of 11.5 months.
During the three months ended June 30, 2021, the Company issued 700,000 warrants for services. The warrants have an exercise price of $0.05 per share and expire on May 18, 2022. The fair value of the warrants was $184,457, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.06%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 376%; and (4) an expected life of 1 year.
In September 2021, the Company issued 1,466,666 warrants in connection with a note in the amount of $220,000. The warrants have an exercise price of $0.15 per share and expire on September 21, 2026. The relative fair value of the warrants 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 Company recorded debt discount of $110,000 related to the warrants.
During the fourth quarter of 2021, the Company issued 10,463,332 warrants in connection with convertible notes in the aggregate amount of $1,412,000. The warrants have an exercise price of $0.15 per share and expire five years from the dates 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 Company recorded debt discount of $1,295,000 related to the warrants, limited to the proceeds received.
Note 8. Notes Payable
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%.
GEX Management, Inc.
On August 30, 2021, the Company entered into 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 September 30, 2021. 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.
Paycheck Protection Program Loans
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.
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”), 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 August 29, 2021 and the Company recorded forgiveness of debt income of $146,685, including accrued interest forgiven of $1,935.
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 16, 2021, the U.S. Small Business Administration announced that the deferment period for the repayment would be extended an additional 12 months.
Secured Promissory Notes
On April 3, 2020, the Company received $54,000 pursuant to a secured promissory note. The note bore interest at 10% per year and matured on June 25, 2020. The note provided for a minimum payment of $7,500 for fees and expenses incurred by the lender. The note was secured by the Company’s receivables, inventory and interest in a certain purchase order issued to the Company by a customer. The note was repaid on August 3, 2020.
On October 8, 2020, the Company received $18,500 pursuant to a secured promissory note. The note bore interest at 10% per year and matured on December 8, 2020. The note provided for a minimum payment of $2,300 for fees and expenses incurred by the lender. The note was secured by the Company’s receivables, inventory and interest in a certain purchase order issued to the Company by a customer. The note was repaid on December 7, 2020.
On December 15, 2020, the Company received $26,200 pursuant to a secured promissory note. The note bears interest at 10% per year and matures on March 20, 2021. The note provides for a minimum payment of $2,000 for fees and expenses incurred by the lender. The note is secured by the Company’s receivables, inventory and interest in a certain purchase order issued to the Company by a customer. The principal amount of $26,200 was repaid on March 18, 2021.
Note 9. Convertible Notes Payable
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.
2021 Convertible Notes
On September 20, 2021, the Company entered into 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.
A total of $220,000 has been recorded as debt discount, and 3,000 has been recorded as deferred debt costs. The discount and costs will be amortized to interest expense over the term of the note, and $62,929 was amortized during the year ended December 31, 2021.
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 $1,295,000 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, and $142,233 was amortized during the year ended December 31, 2021.
The Company’s convertible promissory notes at December 31, 2021 and 2020 are as follows:
| | December 31, 2021 | | | December 31, 2020 | |
Convertible notes payable, bearing interest at 8- 10% | | $ | 1,632,000 | | | $ | 1,453,960 | |
Unamortized debt discount | | | (1,428,726 | ) | | | - | |
Unamortized deferred debt issuance cost | | | (9,112 | ) | | | - | |
Total | | | 194,162 | | | | 1,453,960 | |
Current portion | | $ | 194,162 | | | $ | 1,453,960 | |
Note 10. 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 $124,290 and $556,727 for the years ended December 31, 2021 and 2020, respectively and were charged to interest expense.
During the year ended December 31, 2021, through the date of settlement of the debt, the Company recorded income of $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.
During the year ended December 31, 2020, the Company recorded expense of $Warrant coverage 939,464 related to the change in the fair value of the derivatives.
During the second quarter of 2021 the Company issued 7,036,668 shares of common stock, valued at $1,829,534 and 2,826,733 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 11. Stock Options and Warrants
Options
In June 2000 and November 2009, the Company’s Board of Directors adopted, and the shareholders approved, the 2000 Plan and 2009 Plan, respectively (together the “Plans”). The Plans provide for the granting of options to qualified employees of the Company, independent contractors, consultants, directors, and other individuals. The Company’s Board of Directors approved and made available 5,547 and 7,500 shares of common stock to be issued pursuant to the 2000 Plan and the 2009 Plan, respectively. On February 27, 2015, the shareholders approved the Dais Analytic Corporation 2015 Stock Incentive Plan (the “2015 Plan”). The number of shares of common stock reserved for issuance under the 2015 Plan is 5,000. The Plans and the 2015 Plan permit grants of options to purchase common shares authorized and approved by the Company’s Board of Directors. The shares authorized by the Plans have been reduced pursuant to the one-for-2,000 reverse stock split effective December 6, 2019.
There were no stock options issued during the years ended December 31, 2021 and 2020.
The following summarizes the information relating to outstanding stock options activity during 2021 and 2020:
| | Common Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2019 | | | 10,514 | | | $ | 252.61 | | | | 5.5 | | | $ | - | |
Granted | | | - | | | | - | | | | | | | | | |
Forfeited or expired | | | (638 | ) | | | 600.00 | | | | | | | | | |
Outstanding at December 31, 2020 | | | 9,876 | | | | 230.18 | | | | 4.8 | | | $ | - | |
Granted | | | - | | | | - | | | | | | | | | |
Forfeited or expired | | | (9,876 | ) | | | 230.18 | | | | | | | | | |
Outstanding at December 31, 2021 | | | - | | | $ | - | | | | - | | | $ | - | |
Exercisable at December 31, 2021 | | | - | | | $ | - | | | | - | | | $ | - | |
There was no stock compensation expense related to options for the years ended December 31, 2021 and 2020.
Warrants
At December 31, 2021, the Company had outstanding warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements and consulting agreements. Information relating to these warrants is summarized as follows:
| | Number of Shares | | | Weighted Average Remaining Life (Years) | | | Weighted Average Exercise Price | |
Warrants at December 31, 2019 | | | 239,125 | | | | 9.7 | | | $ | 3.41 | |
Granted | | | - | | | | | | | | - | |
Forfeited or expired | | | - | | | | | | | | - | |
Warrants at December 31, 2020 | | | 239,125 | | | | 8.7 | | | $ | 3.41 | |
Granted | | | 16,206,731 | | | | | | | | 0.18 | |
Forfeited or expired | | | (239,125 | ) | | | | | | | 3.41 | |
Warrants at December 31, 2021 | | | 15,456,731 | | | | 3.8 | | | $ | 0.18 | |
Note 12. Deferred Revenue
In December 2017, the Company and Zhejiang MENRED Environmental Tech Co, Ltd., Zhejiang Province, China (“Menred”), entered into a royalty bearing License and Supply Agreement (the “License and Supply Agreement”), effective December 21, 2017. Pursuant to the License and Supply Agreement, the Company licensed certain intellectual property and improvements to Menred, for use in the manufacture and sale of certain product types sold by Menred mostly for installation in 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 License and Supply Agreement. Also pursuant to the License and Supply Agreement, each year the Parties have minimum sales commitments of each other’s products. The License and Supply Agreement has a ten-year term with mutually agreed upon five-year extensions.
The Company recognized license revenue of $50,000 for each of the years ended December 31, 2021 and 2020. Deferred revenue for the agreement was $298,656 and $348,656 at December 31, 2021 and 2020, respectively. The Company recognized royalty revenue of $0 for the years ended December 31, 2021 and 2020.
Note 13. 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 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 one 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 | | $ | 8,850.00 | | | Yes | | Yes | |
The O-Ring Store | | $ | 10,334.00 | | | No | | Yes | |
Total | | $ | 117,960.06 | | | | | | |
Note 14. Income Taxes
The Company had, subject to limitation, approximately $25 million of net operating loss carryforwards at December 31, 2021, of which approximately $18.3 million will expire at various dates beginning in 2021 through 2037. In addition, the Company has research and development tax credits of approximately $378,000 at December 31, 2021 available to offset future taxable income, which will expire from 2030 through 2038. We have provided a 100% valuation allowance for the deferred tax benefits resulting from the net operating loss carryover and our tax credits due to our lack of earnings history. In addressing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The valuation allowance decreased by approximately $323,000 and $781,000 for the years ended December 31, 2021 and 2020, respectively. Significant components of deferred tax assets and liabilities are as follows:
| | 2021 | | | 2020 | |
Deferred revenue | | $ | 76,000 | | | $ | 88,000 | |
Depreciation | | | 1,000 | | | | 5,000 | |
Accrued compensation | | | 550,000 | | | | 529,000 | |
Research and development credit | | | 378,000 | | | | 362,000 | |
Accrued warranty and interest expense | | | 564,000 | | | | 191,000 | |
Net operating loss carryforward | | | 6,308,000 | | | | 7,025,000 | |
Valuation allowance | | | (7,877,000 | ) | | | (8,200,000 | ) |
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| | December 31, | |
| | 2021 | | | 2020 | |
Federal statutory income tax rate | | | (21.0 | )% | | | (21.0 | )% |
State income taxes, net of federal benefit | | | (4.3 | ) | | | (4.3 | ) |
Permanent differences | | | 65.2 | | | | 53.75 | |
Change in valuation allowance | | | (39.9 | ) | | | (28.4 | ) |
Provision for income taxes | | | 0.0 | % | | | 0.0 | % |
As of December 31, 2021, the Company has not performed an IRC Section 382 study to determine the amount, if any, of its net operating losses that may be limited because of the ownership change percentages during 2021 and prior years. However, the Company will complete the study prior to the utilization of any of its recorded net operating losses.
Income Tax returns remain open by statue, generally for the years 2018 through 2021.
Note 15. Subsequent Events
The following material events occurred after December 31, 2021, and as such this requires recognition or disclosure in the financial statements:
Item 1:
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”).
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.
A copy of the Certificate of Amendment to the Certificate of Incorporation, which included the respective Certificates of Designation for the Series C Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E Convertible Preferred Stock and Series F Convertible Preferred Stock, is attached as Exhibit 3.11 to this Annual Report on Form 10-K.
Reference is made to the complete disclosure contained in Exhibit 3.11 of this Annual Report for the preferences, rights, limitations qualifications and restrictions, including conversion rights, of each of the above-referenced New Series of Preferred Stock.
Item Two
The Company and its Board of Directors have reached a tentative agreement on April 12, 2022, with its Senior Secured Noteholder. The transaction has been renegotiated. The Parties are working to complete a definitive agreement prior to May 15, 2022. Therefore, this update on the status of the Senior Secured Note has been placed in the Subsequent Events section. When the definitive agreement is complete relevant information will be shared in an SEC Form 8K filing.
