NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
Note
1 – Nature of Operations and Liquidity
Organization
and Operations
Odyssey
Semiconductor Technologies, Inc. (“Odyssey Technologies”) was incorporated on April 12, 2019 under the laws of the
State of Delaware. Odyssey Technologies, through its wholly-owned subsidiary, Odyssey Semiconductor, Inc. (“Odyssey Semiconductor”)
and Odyssey Semiconductor’s wholly owned subsidiary, JR2J, LLC (“JR2J”) (collectively, the “Company”),
is a semiconductor device company developing high-voltage power switching components and systems based on proprietary Gallium
Nitride (“GaN”) processing technology.
COVID-19
The
extent of the impact and effects of the recent outbreak of the coronavirus (COVID-19) on the operation and financial performance
of our business will depend on future developments, including the duration and spread of the outbreak, related travel advisories
and restrictions, the consequential potential of staff shortages, supply chain delays, and project development delays, all of
which are highly uncertain and cannot be predicted. If demand for the Company’s services or the Company’s ability
to service customers are impacted for an extended period, especially as it relates to major customers, our financial condition
and results of operations may be materially adversely affected.
Liquidity
and Financial Condition
As
of June 30, 2022, the Company had a cash balance, working capital and accumulated deficit of approximately $600,000, $221,000
and $9,100,000, respectively. During the six months ended June 30, 2022, the Company generated a net loss of approximately $2,462,000.
The Company believes its current cash on hand will not
be sufficient to meet its operating obligations and capital requirements for at least twelve months from the issuance of these financial
statements. This raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will need to raise
further capital through the sale of additional equity or debt securities or other debt instruments to support its future operations. The
Company has engaged with an investment bank to assist with the fund raise; however, there can no assurance that a financing can be completed
on terms acceptable to the Company. The Company has also taken preliminary steps to file a registration statement on Form S-1 with the
SEC for a proposed public offering, but there is no assurance that the offering will be successful. The Company received $1.25 million
proceeds on a bridge financing in August 2022 – See Note 12.
The
Company’s operating needs include the planned costs to operate its business, including amounts required to fund working
capital and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will
depend on many factors, including the Company’s ability to successfully commercialize its products and services, competing
technological and market developments, and the need to enter into collaborations with other companies or acquire other companies
or technologies to enhance or complement its product and service offerings. There is also no assurance that the amount of funds
the Company might raise will enable the Company to complete its development initiatives or attain profitable operations. If the
Company is unable to obtain additional financing on a timely basis, it may have to curtail its development, marketing and promotional
activities, which would have a material adverse effect on the Company’s business, financial condition and results of operations,
and ultimately, the Company could be forced to discontinue its operations and liquidate.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they
do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of
management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary
for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2022 and for
the three and six months ended June 30, 2022 and 2021. The results of operations for the three and six months ended June 30, 2022
are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. These
unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and
related disclosures as of December 31, 2021 and for the year then ended which have been previously filed.
Use
of Estimates
Preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect
the amounts reported in the financial statements and the amounts disclosed in the related notes to the financial statements. The
Company’s significant estimates used in these financial statements include, but are not limited to, fair value calculations
for equity securities, stock-based compensation, the collectability of receivables, the recoverability and useful lives of long-lived
assets, and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates
could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably
possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ
from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents
in the financial statements. As of June 30, 2022 and December 31, 2021, the Company had no cash equivalents. The Company has cash
on deposits in several financial institutions which, at times, may be in excess of Federal Deposit Insurance Corporation (“FDIC”)
insurance limits. The Company has not experienced losses in such accounts and periodically evaluates the creditworthiness of its
financial institutions. The Company reduces its credit risk by placing its cash and cash equivalents with major financial institutions.
Restricted
Cash
Restricted
cash was comprised of cash held as a security deposit in connection with the Company’s operating lease. See Note 8 –
Commitments and Contingencies - Operating Lease for additional details.
Deferred
Expenses
Deferred
expenses consist of labor, materials and other costs that are attributable to customer contracts that the Company has not completed
its performance obligation under the contract and, as a result, has not recognized revenue. As of June 30, 2022 and December 31,
2021, deferred expenses were approximately $62,000 and $8,000, respectively.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives,
once the asset is placed in service. Expenditures for maintenance and repairs, which do not extend the economic useful life of
the related assets, are charged to operations as incurred, and expenditures which extend the economic life are capitalized. Leasehold
improvements are depreciated over the lesser of their estimated useful lives or the remaining term of their respective lease.
When assets are retired or otherwise disposed of, the costs and related accumulated depreciation or amortization are removed from
the accounts and any gain or loss on disposal is recognized in the statement of operations for the respective period.
The
Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to
result from the use of the asset and its eventual disposition are less than its carrying amount.
The
estimated useful lives of property and equipment are as follows:
| Schedule of estimated useful lives of property and equipment |
| Asset |
Useful lives (years) |
| Computer and office equipment |
5 |
| Lab equipment |
5 |
| Leasehold improvements |
shorter of useful life or lease term |
| Machinery |
7-15 |
| Furniture |
7 |
Offering
Costs
Deferred
offering costs, which primarily consist of direct, incremental professional fees incurred in connection with a debt or equity
financing, are capitalized as non-current assets on the consolidated balance sheets. Once the financing closes, the Company reclassifies
such costs as either discounts to notes payable or as a reduction of proceeds received from equity transactions so that such costs
are recorded as a reduction of additional paid-in capital. If the completion of a contemplated financing was deemed to be no longer
probable, the related deferred offering costs would be charged to general and administrative expense in the consolidated financial
statements.
Leases
In
February 2016, the Financial Accounting Standards Board (the “FASB”) established Accounting Standards Codification
(“ASC”) Topic 842, “Leases”, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which
requires lessees to now recognize operating leases on the balance sheet and disclose key information about leasing arrangements.
ASC Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842;
ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard
establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the
balance sheet for all leases with a term longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern and classification of expense recognition in the income statement. Lessor accounting under
the new standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. The Company
adopted the new standard on January 1, 2022 using the modified retrospective transition method, which applies the provisions of
the standard at the effective date without adjusting the comparative periods presented. The Company adopted the following practical
expedients and accounting policies elections related to this standard:
| |
● |
Short-term lease accounting policy election allowing lessees to not recognize ROU assets and liabilities for leases with a term of 12 months or less; |
| |
● |
The option to not separate lease and non-lease components in the Company’s lease contracts; and |
| |
● |
The package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii) not reassessing the capitalization of initial direct costs for any existing leases. |
Adoption
of this standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of approximately
$694,000 on the consolidated balance sheet as of January 1, 2022. Disclosures related to the amount, timing and uncertainty of
cash flows arising from leases are included in Note 8, Leases.
Revenue
Recognition
The
Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The
Company determines revenue recognition through the following steps:
| |
● |
Step 1: Identify the contract with the customer; |
| |
● |
Step 2: Identify the performance obligations in the contract; |
| |
● |
Step 3: Determine the transaction price; |
| |
● |
Step 4: Allocate the transaction price to the performance obligations in the contract; and |
| |
● |
Step 5: Recognize revenue when the company satisfies a performance obligation. |
A
majority of the Company’s revenues are generated from contracts with customers that require it to design, develop, manufacture,
test and integrate complex equipment and to provide engineering and technical services according to customer specifications. These
contracts are often priced on a time and material type basis. Revenues on time and material type contracts are generally recognized
in each period based on the amount billable to the customer which is based on direct labor hours expended multiplied by the contractual
fixed rate per hour, plus the actual costs of materials and other direct non-labor costs.
The
timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded
when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment
precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
Contract assets are comprised of unbilled contract receivables related to revenues earned but not yet invoiced to customers.
During
the six months ended June 30, 2022 and 2021, there was no revenue recognized from performance obligations satisfied (or partially
satisfied) in previous periods.
The
Company generated revenue from government contracts that reimburse the Company for certain allowable costs for funded projects.
Such projects were completed in 2021. For contracts with government agencies, when the Company has concluded that it is the principal
in conducting the research and development expenses and where the funding arrangement is considered central to the Company’s
ongoing operations, the Company classifies the recognized funding received as revenue. The Company has determined that revenue
generated from government grants is outside the scope of ASC 606 and, as a result, the Company recognizes revenue upon incurring
qualifying, reimbursable expenses. During the six months ended June 30, 2022 and 2021, the Company recognized approximately $0
and $418,000, respectively, of grant revenue.
Research
and Development
Research
and development expenses are charged to operations as incurred.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
The fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which
services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an award, the
Company issues new shares of common stock out of its authorized shares.
The
risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent
with the expected term of the instrument being valued. Option forfeitures are accounted for at the time of occurrence. The expected
term used is the estimated period of time that warrants or options are expected to be outstanding. The Company utilizes the “simplified”
method to develop an estimate of the expected term of “plain vanilla” employee options. For investor warrants and
non-employee options, the expected term used is the contractual life of the instrument being valued. The Company uses its trading
history to support its historical volatility calculations.
Net
(Loss) Income per share of Common Stock
Basic
net (loss) income per share of common stock is computed by dividing net (loss) income by the weighted average number of vested
shares of common stock outstanding during the period. Diluted net income per share of common stock is computed by dividing
net income by the weighted average number of common and dilutive common-equivalent shares outstanding during each period.
The
following shares were excluded from the calculation of weighted average dilutive shares of common stock because their inclusion
would have been anti-dilutive:
| Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share | | |
| | | |
| | |
| | |
As of June 30, |
| | |
2022 | |
2021 |
| Warrants | | |
| 245,696 | | |
| 245,696 | |
| Options | | |
| 2,048,246 | | |
| 3,550,031 | |
| Total | | |
| 2,293,942 | | |
| 3,795,727 | |
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included
or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the
difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary
differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. The
Company has recorded a full valuation allowance against its deferred tax assets for all periods, due to the uncertainty of future
utilization.
The
Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Management has evaluated and concluded that there were no material uncertain
tax positions requiring recognition in the Company’s financial statements as of June 30, 2022 and December 31, 2021. The
Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The
Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling,
general and administrative expenses in the consolidated statements of operations.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the 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. We base our estimates and judgments
on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable
under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated
financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for
the periods presented.
On
an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to the fair
value of stock options for determination of the stock-based compensation expense. The amount of stock based compensation has been
a significant expense over the six months ended June 30, 2022 and 2021. The assumptions that go into the Black-Scholes calculation
are the major driver of the calculation of the fair value of the stock options at the date of grant. The major assumption of volatility
is based upon historical data, and the majority of the other assumptions used in the Black Scholes computation is based upon the
terms of the specific stock option grant.
Revenues
and cost of sales are important metrics in demonstrating the completion of projects and shipment of products to customers, and
the profitability of such revenues. Accordingly, revenue recognition is a critical accounting policy. The timing of the Company’s
revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized
prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of
the related services, the Company records deferred revenue until the performance obligations are satisfied. Contract assets are
comprised of unbilled contract receivables related to revenues earned but not yet invoiced to customers. We review the status
of each project at each period end and determine whether the earnings process is complete and the revenue and costs of sales should
be recognized.
Recently
Issued Accounting Standards
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-13, “Financial Instruments - Credit Losses”. This update requires immediate recognition of management’s
estimates of current expected credit losses (“CECL”). Under the prior model, losses were recognized only as they were
incurred. The new model is applicable to all financial instruments that are not accounted for at fair value through net income.
The standard is effective for fiscal years beginning after December 15, 2022 for public entities qualifying as small reporting
companies. Early adoption is permitted. The Company is currently assessing the impact of this update on our consolidated financial
statements and do not anticipate a significant impact.
Note
3 - Prepaid Expenses and Other Current Assets
Prepaid
expenses consisted of the following:
| Schedule of Prepaid expenses and other current assets | |
| |
|
| | |
June 30,
2022 | |
December 31, 2021 |
| | |
| |
|
| Insurance | |
$ | 60,294 | | |
$ | 30,666 | |
| Legal Fees | |
| — | | |
| 16,180 | |
| Deposit for equipment purchase | |
| 25,288 | | |
| 25,288 | |
| Deposit for leased equipment purchase (Note 11) | |
| 153,126 | | |
| 153,126 | |
| Total | |
$ | 238,708 | | |
$ | 225,260 | |
In
December 2021, the Company made a deposit of $153,126 to purchase equipment (included in prepaid expenses in the accompanying
balance sheet). The remainder of the purchase price was to be financed through a long-term lease. Terms and finalization of the
lease has not yet occurred, and the Company has requested a refund of its deposit from the initial lessor who did not follow through
with lease financing based on their original lease proposal.
Note
4 – Property and Equipment
Property
and equipment consisted of the following:
| Schedule of property and equipment | |
| |
|
| | |
June 31,
2022 | |
December 31, 2021 |
| | |
| |
|
| Computer and office equipment | |
$ | 2,807 | | |
$ | 2,807 | |
| Lab equipment | |
| 15,606 | | |
| 15,606 | |
| Furniture | |
| 43,705 | | |
| 43,705 | |
| Leasehold improvements | |
| 687,632 | | |
| 450,374 | |
| Machinery | |
| 679,265 | | |
| 627,640 | |
| Subtotal | |
| 1,429,015 | | |
| 1,140,132 | |
| Accumulated Depreciation | |
| (377,778 | ) | |
| (286,842 | ) |
| | |
| | | |
| | |
| Property and Equipment, net | |
$ | 1,051,237 | | |
$ | 853,290 | |
Depreciation
and amortization expense related to property and equipment was approximately $91,000 and $82,000 for the six months ended June
30, 2022 and 2021, respectively.
Note
5 - Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following:
| Schedule of Accounts Payable and Accrued Expenses | |
| |
|
| | |
June 30, 2022 | |
December 31, 2021 |
| | |
| |
|
| Accounts payable | |
$ | 212,864 | | |
$ | 67,970 | |
| Accrued expenses | |
| 106,836 | | |
| 29,994 | |
| Credit cards payable | |
| 25,266 | | |
| 36,690 | |
| Accrued interest and other | |
| 8,404 | | |
| 13,293 | |
| Total | |
$ | 353,370 | | |
$ | 147,947 | |
Note
6 – Stockholders’ Equity
Authorized
Capital
The
Company is authorized to issue 45,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred
stock, $0.0001 par value per share. The holders of the Company’s common stock are entitled to one vote per share. No preferred
shares have been issued as of the date hereof.
Common
Stock Transactions
In
March 2021, the Company sold 1,251,625 shares of common stock at $4.00 per share for gross proceeds of $5,006,500 in connection
with a private placement of securities. The costs associated with such issuance were $407,445 in cash and warrants to purchase
89,730 shares of Common Stock of the Company with a term of 5 years and an exercise price of $4.00 per share. An aggregate of
$480,000 of proceeds were raised from related parties (including an aggregate of $430,000 from Alex Behfar’s family member,
Richard Brown, Richard Ogawa and James Shealy), representing approximately 10% of the total gross proceeds.
Note
7 – Equity Compensation Plan
On
June 18, 2019, the Board of Directors and a majority of the Company’s shareholders, respectively, approved the 2019
Equity Compensation Plan (the “2019 Plan”). The 2019 Plan provides for the issuance of incentive stock options, non-statutory
stock options, rights to purchase common stock, stock appreciation rights, restricted stock, restricted stock, performance shares
and performance units to employees, directors and consultants of the Company and its affiliates. The 2019 Plan requires the exercise
price of stock options to be not less than the fair value of the Company’s common stock on the date of grant, or 110% of
fair value in the case of incentive options granted to a ten-percent stockholder.
On
March 11, 2020, the Company granted the following 10 ten-year options to purchase shares of common stock at an exercise price
of $1.50 per share to the Company’s then newly appointed Executive Chairman and Acting Chief Executive Officer under the
2019 Plan: (i) an option to purchase 965,850 shares of common stock that vests ratably on a monthly basis over two years and (ii)
an option to purchase 321,950 shares of common stock that vests based on performance criteria to be mutually agreed to by the
Board and the executive. The grant was reduced to 500,000 options, including 375,000 options and 125,000 options respectively
under the two categories, due to limitations under the 2019 Plan. The terms of the 125,000 performance-based options were established
in the quarter ended December 31, 2021. The terms of the performance-based options were met during the quarter ended March 31,
2021.
From
June 1 to June 22, 2021, the Company granted five and 10 ten-year options to purchase 388,246 shares of common stock at an exercise
price of $2.90 to $3.93 per share to employees, an advisory board member and board members under the 2019 Plan that vest over
two to five years.
On
September 22, 2021, upon the resignation of our then Chief Executive Officer and Chairman, a total of 1,911,160 unvested options
that he received on September 25, 2019, March 11, 2020, July 16, 2020 and September 22, 2020 were forfeited as of such date. On
such date, the Company also provided the acceleration of 25,000 unvested stock options issued on September 25, 2019, which were
to vest as of September 25, 2021. The impact of the modification of the stock option was not material.
On
December 30, 2021, the Company granted five and 10 ten-year options to purchase 445,000 shares of common stock at an exercise
price of $1.77 per share to employees, an advisory board member and board members under the 2019 Plan that vest over one to four
years.
On
February 9, 2022, subject to the shareholders’ approval, the Board of Directors approved that the aggregate number of shares
authorized for issuance as awards under the 2019 Plan shall be 4,600,000 shares plus an annual increase on the first day of each
fiscal year for the rest of the term of the Plan in an amount equal to the lesser of (i) 5% of the outstanding shares of common
stock of the Company on the last day of the immediately preceding year or (iii) an amount determined by the Board of Directors.
On April 26, 2022, the Company
granted to Mr. Davidson an option to purchase 650,000 shares of the Company’s common stock at $1.66 per share. The option will vest
at the rate of 25% per year on the anniversary date from the first day of his employment starting from April 1, 2023. The option will
be subject to acceleration in vesting in connection with the occurrence of a change of control event during the term of Mr. Davidson’s
employment.
The
stock option activity from January 1, 2021 through June 30, 2022 is as follows:
| Schedule of stock option activity | |
| | | |
| | | |
| | |
| | |
Shares | |
Weighted-Average Exercise
Price per share | |
Weighted-Average Remaining
Contractual Life (years) |
| | |
| |
| |
|
| Balance, December 31, 2020 | |
| 3,257,410 | | |
$ | 1.50 | | |
| 9.1 | |
| Options granted | |
| 833,246 | | |
| 2.67 | | |
| 6.7 | |
| Options exercised | |
| (45,625 | ) | |
| 1.50 | | |
| — | |
| Options expired | |
| (735,625 | ) | |
| 1.50 | | |
| — | |
| Options forfeited | |
| (1,911,160 | ) | |
| 1.50 | | |
| — | |
| Balance, December 31, 2021 | |
| 1,398,246 | | |
| 2.20 | | |
| 6.3 | |
| Options granted | |
| 650,000 | | |
| 1.66 | | |
| 9.8 | |
| Balance, June 30, 2022 | |
| 2,048,246 | | |
| 2.03 | | |
| 6.9 | |
| Vested shares at June 30, 2022 | |
| 648,145 | | |
$ | 1.99 | | |
| 1.9 | |
The
following table summarizes the outstanding options at June 30, 2022 by exercise price.
| Schedule Of Outstanding Options | |
| |
|
| Exercise price | |
Outstanding options | |
Exercisable options |
| $ | 1.66 | | |
| 650,000 | | |
| 0 | |
| $ | 1.50 | | |
| 565,000 | | |
| 460,000 | |
| $ | 1.77 | | |
| 445,000 | | |
| 54,583 | |
| $ | 3.93 | | |
| 268,000 | | |
| 106,000 | |
| $ | 2.90 | | |
| 70,246 | | |
| 17,562 | |
| $ | 3.55 | | |
| 50,000 | | |
| 10,000 | |
| | | | |
| 2,048,246 | | |
| 648,145 | |
At
June 30, 2022, the Company has 2,236,129 options available to grant under the 2019 Plan.
The
Company has estimated the fair value of all stock option awards as of the date of grant by applying the Black-Scholes option-pricing
model. In applying the Black-Scholes option pricing model, the Company used the following weighted average assumptions for issuances
during the six months ended June 30, 2022 and 2021:
| Schedule
of Valuation Assumptions |
|
|
|
| |
|
2022 |
2021 |
| Risk-free
interest rate |
|
|
2.77 |
% |
1.1% |
| Expected
term |
|
|
7.0
years |
|
7.5
years |
| Expected
volatility |
|
|
100.4 |
% |
81% |
| Expected
dividends |
|
|
0 |
|
0 |
| Grant
date fair value of common stock |
|
$ |
1.38/share |
|
$
2.45
share |
During
the six months ended June 30, 2022, the Company recognized stock-based compensation expense related to stock options of approximately
$510,000, of which approximately $181,000 was recorded as part of research and development expenses and $312,000 was included
within general and administrative expenses and $17,000 of which was included within cost of revenues on the consolidated statements
of operations. See Note 11 for further discussion. During the six months ended June 30, 2021, the Company recognized stock-based
compensation expense related to stock options of approximately $1,215,000 ($1,144,000 of which was included within general and
administrative expenses, $42,000 of which was included in research and development expenses, $29,000 of which was included within
cost of revenues).
As
of June 30, 2022, there was unamortized stock-based compensation of approximately $1,900,000 which the Company expects to recognize
over approximately 3.7 years. At June 30, 2022, the intrinsic value of outstanding and vested stock options was nil. 0
Note
8 - Commitments and Contingencies
Litigations,
Claims, and Assessments
From
time to time, the Company is involved in various disputes, claims, liens and litigation matters arising out of the normal course
of business which could result in a material adverse effect on the Company’s combined financial position, results of operations
or cash flows. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other
sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably
estimated. As of June 30, 2022 and June 30, 2021, the Company had no outstanding claims or litigation and had no liabilities recorded
for loss contingencies.
Operating
Lease
On
August 21, 2019, the Company entered into a lease for a 10,000 square foot facility consisting of lab and office space. The lease
requires monthly payments of $16,667 and expires on November 30, 2025. The Company has arranged for a $100,000 letter of credit
in favor of the landlord in lieu of a security deposit, which was included as restricted cash on the consolidated balance sheet
as of June 30, 2022 and December 31, 2021.
The
assets and liabilities from operating leases are recognized at the lease commencement date based on the present value of remaining
lease payments over the lease term using the Company’s incremental borrowing rates or implicit rates, when readily determinable.
Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet. The Company’s
operating leases do not provide an implicit rate that can readily be determined. Therefore, the Company uses a discount rate based
on its estimated incremental commercial borrowing rate,
The
following table presents information about the amount and timing of liabilities arising from the Company’s operating and
finance leases as of June 30, 2022 (in thousands):
| Finance Lease, Liability, Fiscal Year Maturity | |
|
| Maturity of Lease Liabilities | |
Operating Lease Liabilities |
| 2022 (remainder of year) | |
$ | 100,000 | |
| 2023 | |
| 200,000 | |
| 2024 | |
| 200,000 | |
| 2025 | |
| 183,337 | |
| Total undiscounted operating lease payments | |
$ | 683,337 | |
| Less: Imputed interest | |
| 85,382 | |
| Present value of operating lease liabilities | |
$ | 597,955 | |
| Short-term portion | |
| 180,353 | |
| Long term portion | |
$ | 417,602 | |
| | |
| | |
| Remaining lease term in years | |
| 3.4 | |
| Discount rate | |
| 6.50 | % |
The
Company incurred lease expense for its operating lease of approximately $100,000 for the six months ended June 30, 2022 and 2021.
The
Right of Use Asset at June 30, 2022 of $614,620 is being amortized over the lease term.
Employment
Agreement
On
April 18, 2022, Mark Davidson was appointed as Chief Executive Officer of the Company. In connection with Mr. Davidson’s
appointment as Chief Executive Officer of the Company, the Company agreed to pay Mr. Davidson an annual cash compensation of $300,000.
For 2022, Mr. Davidson will be eligible for an annual target bonus of up to $150,000 that will be prorated for nine (9) months
(i.e. $112,500) based on his achievements of performance goals to be finalized and approved by the Board of Directors within the
first two months of his employment. Such annual bonus will be paid in stock compensation until such time that the Company has
sufficient cash flow. His eligibility for future bonuses will be determined by the Board of Directors in accordance with the Company’s
future bonus plans and programs.
Note
9 – Concentrations
During
the six months ended June 30, 2022, revenues were generated from two customers. At June 30, 2022, substantially all deferred costs
and deferred revenues are attributable to one customer contract.
During
the six months ended June 30, 2021, substantially all revenues were generated from two governmental customers pursuant to our
contracts with such entities and amounted to approximately 81%
of total revenues. Such contracts were completed during 2021.
Note
10 – Government Loans
Paycheck
Protection Program Loans
On
May 1, 2020, the Company received loan proceeds in the amount of approximately $211,000 under the Paycheck Protection Program
(“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, as amended (“CARES
Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of
such qualifying business. The loans and accrued interest are forgivable after certain time periods further defined in the CARES
Act (the “Covered Period”) as long as the borrower uses the loan proceeds for eligible purposes, including payroll,
benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower
terminates employees or reduces salaries during the Covered Period. The outstanding balance was included in long-term loans payable
at December 31, 2021. On March 6, 2021, the entire loan balance was forgiven.
On
February 24, 2021, the Company received $193,625 pursuant to a promissory note issued under the Paycheck Protection Program Part
2 (“PPP2”). Interest was to accrue at 1% per annum and the note is payable in 60 monthly installments of $3,300 commencing
May 2022; however, on November 15, 2021, the entire loan balance was forgiven.
Economic
Injury Disaster Loan Advance
On
May 1, 2020, the Company received an advance in the amount of $10,000 from the U.S. Small Business Administration (“SBA”)
under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant
to the CARES Act. Such advance amount will reduce the Company’s PPP loan forgiveness amount described above. The Company
received an additional $138,900 under this program on August 30, 2020. The loan is payable in monthly payments of $678 including
interest at 3.75% payable over 30 years.
Tomkins
County Area Development Loan
On
May 27, 2020, the Company received loan proceeds in the amount of $50,000 from the Tomkins County Area Development (“TCAD”)
Emergency Relief Loan Fund. The loan matures after four years and bears interest in the amount of 2.5% per annum, with one year
of no interest or principal payments, followed by three years of monthly payments of principal and interest in the amount of $1,443
per month. The loan is collateralized by certain assets of the Company.
Equipment
Loans
On
August 20, 2020, the Company received a loan of $100,000 from Broome County Industrial Development Agency (5 year facility, 2.5%
annual interest rate, monthly payment of $1,775); on September 1, 2020, the Company received a loan of $100,000 from Southern
Tier Region Economic Development Corporation (5 year facility, 5.0% annual interest rate, monthly payment of $2,072) ; and on
September 10, 2020, the Company received a loan of $75,000 from TCAD (5 year facility, 2.5% annual interest rate, monthly payment
of $1,331). These loans were used to acquire equipment used in the laboratory, and are secured by the underlying assets of the
Company.
The
loans are summarized as follows:
| Schedule of loans | |
| |
|
| | |
June 30,
2022 | |
December 31, 2021 |
| | |
| |
|
| Principal outstanding | |
$ | 386,325 | | |
$ | 423,089 | |
| Deferred loan costs, net of amortization | |
| (3,040 | ) | |
| (3,496 | ) |
| Subtotal | |
| 383,285 | | |
| 419,593 | |
| Less current portion | |
| (75,350 | ) | |
| (74,134 | ) |
| | |
| | | |
| | |
| Total long term portion | |
$ | 307,935 | | |
$ | 345,459 | |
Interest
expense on the above debt instruments was approximately $7,000 and $10,000 for the six months ended June 30, 2022 and 2021, respectively.
Note
11 – Revision of stock compensation expense
During
the second quarter of 2022, the Company identified certain adjustments required to correct balances within stock-based compensation,
which is included in operating expenses in the accompanying consolidated statements of operations, related to employees, directors
and consultants (see Note 7 – Equity Compensation Plan) recorded during the three-month periods from June 2021 to March
2022. The Company had incorrectly calculated the amortization of the stock-based compensation for the periods from June 2021 to
March 2022. The error discovered resulted in an understatement of the stock-based compensation expense for the periods June 2021
to March 2022 summarized as follows:
| Schedule
of stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As
previously |
|
|
|
|
| |
|
reported |
|
adjustment |
|
As
if restated |
| |
|
|
|
|
|
|
| Three
months ended 6/30/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
(74,264 |
) |
|
|
(369 |
) |
|
|
(74,633 |
) |
| Operating expenses |
|
|
1,238,394 |
|
|
|
24,253 |
|
|
|
1,262,647 |
|
| Operating loss |
|
|
(1,312,658 |
) |
|
|
24,622 |
|
|
|
(1,288,036 |
) |
| Net loss |
|
|
(1,315,083 |
) |
|
|
(24,622 |
) |
|
|
(1,339,705 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Additional paid in capital |
|
|
9,929,130 |
|
|
|
24,622 |
|
|
|
9,953,752 |
|
| Accumulated Deficit |
|
|
(5,726,594 |
) |
|
|
(24,622 |
) |
|
|
(5,751,216 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Six
months ended 6/30/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
(226,148 |
) |
|
|
(369 |
) |
|
|
(226,517 |
) |
| Operating expenses |
|
|
2,187,905 |
|
|
|
24,253 |
|
|
|
2,212,158 |
|
| Operating loss |
|
|
(2,414,053 |
) |
|
|
24,622 |
|
|
|
(2,389,431 |
) |
| Net loss |
|
|
(2,210,194 |
) |
|
|
(24,622 |
) |
|
|
(2,234,816 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Additional paid in capital |
|
|
9,929,130 |
|
|
|
24,622 |
|
|
|
9,953,752 |
|
| Accumulated Deficit |
|
|
(5,726,594 |
) |
|
|
(24,622 |
) |
|
|
(5,751,216 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Three
months ended 9/30/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
126,983 |
|
|
|
(1,173 |
) |
|
|
125,810 |
|
| Operating expenses |
|
|
858,099 |
|
|
|
77,034 |
|
|
|
935,133 |
|
| Operating loss |
|
|
(731,116 |
) |
|
|
78,207 |
|
|
|
(652,909 |
) |
| Net loss |
|
|
(710,663 |
) |
|
|
(78,207 |
) |
|
|
(788,870 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Additional paid in capital |
|
|
9,837,157 |
|
|
|
78,207 |
|
|
|
9,915,364 |
|
| Accumulated Deficit |
|
|
(6,123,934 |
) |
|
|
(78,207 |
) |
|
|
(6,202,141 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Nine
months ended 9/30/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
(99,165 |
) |
|
|
(1,542 |
) |
|
|
(100,707 |
) |
| Operating expenses |
|
|
2,732,681 |
|
|
|
101,287 |
|
|
|
2,833,968 |
|
| Operating loss |
|
|
(2,831,846 |
) |
|
|
102,829 |
|
|
|
(2,729,017 |
) |
| Net loss |
|
|
(2,607,534 |
) |
|
|
(102,829 |
) |
|
|
(2,710,363 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Additional paid in capital |
|
|
9,837,157 |
|
|
|
102,829 |
|
|
|
9,939,986 |
|
| Accumulated Deficit |
|
|
(6,123,934 |
) |
|
|
(102,829 |
) |
|
|
(6,226,763 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year
ended 12/31/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
(83,257 |
) |
|
|
(2,431 |
) |
|
|
(85,688 |
) |
| Operating expenses |
|
|
3,474,593 |
|
|
|
159,625 |
|
|
|
3,634,218 |
|
| Operating loss |
|
|
(3,557,850 |
) |
|
|
162,056 |
|
|
|
(3,395,794 |
) |
| Net loss |
|
|
(3,141,753 |
) |
|
|
(162,056 |
) |
|
|
(3,303,809 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Additional paid in capital |
|
|
9,873,345 |
|
|
|
162,056 |
|
|
|
10,035,401 |
|
| Accumulated Deficit |
|
|
(6,658,153 |
) |
|
|
(162,056 |
) |
|
|
(6,820,209 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Three
months ended 3/31/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
(1,061 |
) |
|
|
(1,507 |
) |
|
|
(2,568 |
) |
| Operating expenses |
|
|
1,127,111 |
|
|
|
98,961 |
|
|
|
1,226,072 |
|
| Operating loss |
|
|
(1,128,172 |
) |
|
|
100,468 |
|
|
|
(1,027,704 |
) |
| Net loss |
|
|
(1,129,975 |
) |
|
|
(100,468 |
) |
|
|
(1,230,443 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Additional paid in capital |
|
|
9,924,394 |
|
|
|
262,523 |
|
|
|
10,186,917 |
|
| Accumulated Deficit |
|
|
(7,788,128 |
) |
|
|
(262,523 |
) |
|
|
(8,050,651 |
) |
Based
upon an analysis of Accounting Standards Codification 250 “accounting Changes and Error Corrections (ASC 250), U.S. Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 99, “Materiality” and
SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”), the Company determined this error was immaterial to the previously-issued condensed
consolidated financial statements, and as such no restatement was necessary. Correcting prior-period financial statements for
such immaterial misstatements does not require previously filed reports to be amended. Accordingly, the misstatement was corrected
in the period ended June 30, 2022.
For
the three and six months ended June 30, 2022, correction of this error increased our stock-based compensation expense, total
operating expenses and net loss for periods through March 31, 2022 by $262,523. The stock-based compensation for the quarter ended
June 30, 2022 decreased from $226,250 to $196,227. Loss per share increased in the three and six months ended June 30, 2021 by $0.01 in both periods. Further, additional paid in capital and accumulated deficit at June 30, 2022 also increased by
$262,523.
Note
12 - Subsequent Events
The
Company has evaluated events that have occurred after the balance sheet and through August 15, 2022. Based upon the evaluation, the Company
did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial
statements, except as follows:
On
August 8, 2022, the Company issued a secured convertible promissory note in the amount of $1,250,000 (the “Promissory Note”)
to a trust of which the Company’s Chairman, John Edmunds, is the trustee, pursuant to certain Subscription Agreement (the “Subscription
Agreement”) and Registration Rights Agreement (the “Registration Rights Agreement”).
The
Promissory Note was issued as part of a private placement (the “Offering”) for sale up to $3,750,000 of secured
convertible promissory notes (collectively, the “Promissory Notes”) for a period until August 15, 2022, unless
extended at the option of the Company in its sole discretion for a period of thirty (30) business days.
The
Promissory Notes bear interest at a rate of ten percent (10%) per annum, on a non-compounding basis, and are due and payable on
the earlier of (i) the date upon which the Promissory Notes are converted into equity securities of the Company, or (ii) at maturity
in twelve (12) months. All interest due shall be paid in shares of the Company’s common stock, which shall be valued at
a price equal to the average of the last 20 trading days’ closing price of the Company’s common stock, commencing
on the date immediately preceding the date of conversion for purposes of the interest computation. The Promissory Notes may be
convertible anytime at the discretion of the holders into shares of common stock of the Company at a price equal to the average
of the last 20 trading days’ closing price, or automatically converted upon the closing of a public offering of the Company’s
common stock with aggregate proceeds of at least $5 million at a 15% discount to the per share public offering price.
Pursuant
to the Registration Rights Agreement, the Company agreed to file a registration statement to register the resale of the shares
of common stock issuable upon the conversion of the Promissory Notes within 60 calendar days after the final closing of the Offering
and cause the registration statement to be declared effective by the Securities and Exchange Commission within 90 calendar days
after the filing of the registration statement. In addition, the Company agrees to keep such registration statement effective
for a period of two (2) years after its effective date or for such shorter period ending on the date on which all securities registered
thereunder have been sold.