Notes to Financial Statements
Years Ended December 31, 2018 and 2017
Note 1. Background Information
Dais Analytic Corporation (the “Company”), a New York corporation, has developed and is commercializing applications using its nanostructure polymer technology. The first commercial product, ConsERV
TM
is an energy recovery ventilator (“ERV”) (core and systems) for use in commercial Heating, Ventilating, and Air Conditioning (HVAC) applications. The second commercial product is NanoClear
TM
, a water cleanup process useful in the creation of potable water from most forms of contaminated water including industrial process waste water (petrochemical, steel, etc.) sea, brackish, or waste water. In addition to direct sales, the Company licenses its nanostructures polymer technology to strategic partners in the aforementioned applications and is in various stages of deployment with regard to other applications employing its base technologies. The Company was incorporated in April 1993 and its corporate headquarters is located in Odessa, Florida.
The Company is dependent on third parties to manufacture the key components needed for its nanostructured based 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, 2018, the Company generated a net loss of $3,024,761 and has incurred significant losses since inception. As of December 31, 2018, the Company has an accumulated deficit of $50,137,190, total stockholders’ deficit of $6,801,397, negative working capital of $7,014,439 and cash and cash equivalents of $29,300. The Company used $1,069,228 and $870,428 of cash from operations during the years ended December 31, 2018 and 2017, respectively, which was funded primarily by proceeds from loans from related parties and equity financings. 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:
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1.
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The Company is holding preliminary discussions with parties who are interested in licensing, purchasing the rights to or establishing a joint venture to commercialize applications of the Company’s technology;
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2.
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The Company is seeking capital from certain strategic and/or government (grant) 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
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3.
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The Company is holding discussions with investors and investment banks to obtain debt and/or equity financing.
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Any failure by the Company to timely procure additional financing or investment adequate to fund the ongoing operations, including planned product development initiatives and commercialization efforts, will have material adverse consequences on the Company’s financial condition, results of operations and cash flows as could any unfavorable terms. There are no assurances the Company will be able to obtain the financing and planned product development commercialization. Accordingly, the Company 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 the Company be unable to continue as a going concern.
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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.
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 no uninsured balances at December 31, 2018. The Company has never experienced any losses related to these balances.
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, 2018 and 2017, respectively.
Concentrations
-
At December 31, 2018, one customer accounted for 100% of accounts receivable. For the year ended December 31, 2018, three customers accounted for 74% of total revenue. For the year ended December 31, 2017 one customer accounted for 15% of total revenue.
Other receivables
-
Other receivables consist primarily of receivables from the U.S. Department of Defense and the U.S. Department of Energy (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, 2018 and 2017.
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, 2018 and 2017 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, 2018 and 2017, the Company had $40,341 and $85,173 of raw materials, $12,191 and $9,211 of in-process inventory and $652 and $7,223 of finished goods inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is recorded at December 31, 2018 and 2017, 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 $39,580 and $41,340 for the years ended December 31, 2018 and 2017, 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 2018 and 2017.
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 $21,508 and $19,449 for the years ended December 31, 2018 and 2017, respectively. Based on current capitalized costs, total patent amortization expense is estimated to be approximately $17,000 per year for the next five years and thereafter.
Long-lived assets
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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 or not the asset values are recoverable. The Company did not recognize impairment on its long-lived assets during the years ended December 31, 2018 or 2017.
Government Funding
–
Government funding represents grants from the U.S. Department of Defense and U.S. Department of Energy and are recognized when there is reasonable assurance that the funding will be received and conditions associated with the funding are met. When fundings 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 fundings 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 $318,359 and $467,524 for the years ended December 31, 2018 and 2017, respectively. The Company accounts for proceeds received from government fundings 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 $64,894 and $150,912 for the years ended December 31, 2018 and 2017, respectively.
Stock issuance costs
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Stock issuance costs are recorded as a reduction of the related proceeds through a charge to stockholders’ deficit.
Common stock
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The Company records common stock issuances when all of the legal requirements for the issuance of such common stock have been satisfied.
Revenue recognition
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The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), commencing from the period under this report. 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 two years for all parts contained therein with the exception of 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, 2018 and 2017, 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, 2018 and 2017, respectively. Revenue derived from the sale of licenses is deferred and recognized as license fee revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized license fee revenue of $50,000 and $1,344 for the years ended December 31, 2018 and 2017, respectively.
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.
Derivative Liability
– The Company has 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
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The Company offers a limited warranty generally ranging from one to three years, A provision for product warranties has been recorded at December 31, 2018 and 2017. The Company has not incurred any warranty expense in either 2018 or 2017.
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.
The value of each grant is estimated at the grant date using the Black-Scholes option model with the following assumptions for options granted during the years ended December 31, 2018 and 2017. There were no grants in 2018.
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Years Ended
December 31,
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2018
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2017
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Dividend rate
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-
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0
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%
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Risk free interest rate
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-
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2.34
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%
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Expected term
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-
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10 years
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Expected volatility
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-
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244
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%
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The basis for the above assumptions are as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding; and expected volatility was calculated based upon historical trends in the Company’s common stock for periods prior to the date the Company’s trading information was available.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated forfeitures at 0% for each of the years ended December 31, 2018 and 2017, respectively.
Non-employee stock-based compensation
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The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50
Equity-Based Payments to Non-Employees
. Stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
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:
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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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·
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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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·
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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
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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, 2018:
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Fair Value at
December 31,
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Fair Value Measurement Using
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2018
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Level 1
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Level 2
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Level 3
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Derivative liability
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$
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1,280,188
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$
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-
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$
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-
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$
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1,280,188
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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, 2018 and 2017:
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December 31,
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December 31,
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2018
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2017
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Balance, beginning of year
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$
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243,501
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$
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-
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Additions
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1,292,460
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1,043,283
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Extinguished derivative liability
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(578,156
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)
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(934,071
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)
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Change in fair value of derivative liabilities
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322,383
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134,289
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$
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1,280,188
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$
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243,501
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Income taxes
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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 2015 through 2018 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 109,663,487 and 62,748,350 were excluded from the computation of diluted earnings per share for the years ended December 31, 2018 and 2017, respectively, because their effect is anti-dilutive.
Recent Accounting Pronouncements
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There are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective as follows:
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. If an award is not probable of vesting at the time a change is made, the new guidance clarifies that no new measurement date will be required if there is no change to the fair value, vesting conditions, and classification. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company has adopted this standard as of the fiscal year beginning January 1, 2018 and does not expect this standard to have a material impact on its financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606). The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted this ASU in the first quarter of fiscal 2018 on a modified retrospective basis. The adoption of this ASU did not have a material effect on the Company's financial statements.
Note 4. Property and Equipment
Property and equipment consist of the following:
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December 31,
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2018
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2017
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Furniture and fixtures
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$
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20,966
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$
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20,966
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Computer equipment and software
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21,761
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21,761
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Demonstration equipment
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92,733
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92,733
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Office and lab equipment
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308,949
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318,649
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Leasehold improvements
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14,808
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9,708
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Property and equipment, gross
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459,217
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463,817
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Less accumulated depreciation
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401,797
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371,917
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Property and equipment, net
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$
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57,420
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$
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91,900
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Note 5. Accrued Expenses, Other
Accrued expenses, other consists of the following:
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December 31,
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2018
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2017
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Accrued expenses, other
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$
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611,070
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$
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254,123
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Accrued warranty costs
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91,531
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91,531
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$
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702,601
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$
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345,654
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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 $56,760 and $56,760 for the years ended December 31, 2018 and 2017, 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, 2018 and 2017 of $1,772,623 and $1,631,147, 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 Patricia Tangredi (the “Holder”) pursuant to which the Company issued a Senior Secured Promissory Note for $150,000 (the “Note”). The 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 the assets of the Company. Ms. Tangredi is the wife of Timothy Tangredi, the Company’s CEO and stockholder, and therefore is a related party of the Company. Pursuant to the Note, the Company is to pay the Holder the principal amount of $150,000 plus all interest due thereon 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) October 31, 2016 (the “Maturity Date”).
During 2016 to the period ended December 31, 2018, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount due was increased to $1,332,000 with an extended maturity date of November 16, 2018. As consideration for the additional proceeds and modification of the maturity date, the Company issued to the related party warrants to purchase an aggregate of 26,250,000 shares of common stock with an exercise price of $0.01 with a ten year exercise period, from the date of issuance and 480,000 shares of common stock in 2017, valued at $17,200, of which $15,400 was recorded against debt due to related party. On January 28, 2019, the Holder further extended the Note pursuant to an amendment. The maturity date was extended to April 8, 2019, effective as of November 16, 2018. As consideration for the additional extension of the maturity date, the Company will issue 20,000 shares of common stock and a warrant to purchase 1,000,000 shares of common stock with an exercise price of $0.01 and a ten year exercise period.
The Company is using the proceeds of the Note and related amendments for working capital purposes. Interest expense on the Note was $159,842 and $88,441 for the years December 31, 2018 and 2017, respectively. Accrued interest on the Note was $261,901 and $102,059 at December 31, 2018 and 2017, respectively.
On February 27, 2015, the Company, and Timothy 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 as a result of the conversion. The Company has waived the conversion requirement from 2015 to the present. See Note 12 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
At December 31, 2018 and 2017, 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.
On November 1, 2018, Dais Analytic Corporation (the “Company”) issued ten (10) shares of Class B Redeemable Preferred Stock par value $0.01 per share (“Class B Stock”) having a stated value of $1.50 per share to Timothy N. Tangredi, the Company’s Chief Executive Officer, in exchange for $15, pursuant to approval of the Board of Directors of the Company.
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 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, 2018 and 2017, the Company’s Board of Directors has authorized 240,000,000 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.
2018 Transactions:
On March 19, 2018, the parties amended the Loan and Security Agreement (“Thirteenth Amendment”) whereby the Maturity Date of the Note was extended to 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) April 10, 2018. The Company is further obligated to issue 20,000 shares of common stock valued at $800. The obligations to issue shares of common stock were recorded as interest expense and current liabilities at December 31, 2018.
On April 23, 2018, the Company entered into a consulting agreement with an outside business consultant. Under the terms of the consulting agreement, services commenced on April 23, 2018 and continued for three months. The Company issued to the consultant 3,000,000 shares of common stock, valued at $120,000. All shares earned under the agreement are considered earned in full and beneficially owned as of April 25, 2018.
On May 7, 2018, the parties amended the Loan and Security Agreement (“Fourteenth Amendment”) whereby the Maturity Date of the Note was extended to 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) May 22, 2018. The Company is further obligated to issue 20,000 shares of $0.01 par value common stock valued at $600. The obligations to issue shares of common stock were recorded as interest expense and current liabilities at December 31, 2018.
On May 15, 2018, the Company issued 2,000,000 shares of common stock as consideration towards past services rendered, valued at $40,000, in accordance with the License and Supply Agreement with Zhejiang MENRED Environmental Tech Co, Ltd. effective December 21, 2017. The value of the shares issued was included in accrued expenses at December 31, 2017.
On June 15, 2018, the Company issued 3,000,000 shares of common stock, valued at $180,000, pursuant to an agreement with an outside business consultant.
On June 20, 2018, the Company issued 148,750 shares of common stock, valued at $8,925, as further incentive to an outside investor to issue a convertible note with a face amount of $89,250. (See Note 8. – Convertible Notes Payable).
On July 11, 2018, the Company issued 200,000 shares of common stock, valued at $14,000, as further incentive to an outside investor to issue a convertible note with a face amount of $100,000. (See Note 8. – Convertible Notes Payable).
On July 31, 2018, the parties amended the Loan and Security Agreement (“Fifteenth Amendment”) whereby the Maturity Date of the Note was extended to 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) August 22, 2018. The Company is further obligated to issue 20,000 shares of $0.01 par value common stock valued at $1,200. The obligations to issue shares of common stock were recorded as interest expense and current liabilities at December 31, 2018.
On October 1, 2018, the Company issued 200,000 shares of common stock, valued at $6,000, as further incentive to an outside investor to continue to issue convertible notes.
On October 31, 2018, the parties amended the Loan and Security Agreement (“Fifteenth Amendment”) whereby the Maturity Date of the Note was extended to 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 16, 2018. The Company is further obligated to issue 20,000 shares of $0.01 par value common stock valued at $600. The obligations to issue shares of common stock were recorded as interest expense and current liabilities at December 31, 2018.
On December 1, 2018, the Company issued 662,500 shares of common stock, valued at $19,875, as further incentive to an outside investor to issue two convertible notes with a face amount of $210,000. (See Note 7. – Convertible Notes Payable).
2017 Transactions:
During the year ended December 31, 2017, the Company entered into a series of amendments to the Loan and Security Agreement entered into with a related party. (See Note 6, Related Party Transaction for further discussion). Under the terms of those amendments the Company issued an aggregate of 480,000 shares of common stock valued at $17,200, of which $15,400 was recorded against debt due to related party.
For the period ending December 31, 2017, the Company issued a total of 3,028,568 shares of common stock, valued at a total of $120,000, in payment of accrued expenses relating to legal services.
For the period ending December 31, 2017, the Company issued an aggregate of 15,050,000 shares of common stock, valued at $490,500, in payment of consulting agreements to outside business consultants.
For the period ending December 31, 2017, the Company issued an aggregate of 750,000 shares of common stock, valued at $22,500, as payment of debt issue costs.
Note 8. Convertible Notes Payable
The Company’s convertible promissory notes at December 31, 2018 and 2017 are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Convertible notes payable, bearing interest at 8%
|
|
$
|
1,284,250
|
|
|
$
|
100,000
|
|
Unamortized debt discount
|
|
|
(440,315
|
)
|
|
|
(91,667
|
)
|
Unamortized deferred debt issuance cost
|
|
|
(34,738
|
)
|
|
|
(4,545
|
)
|
Total
|
|
|
809,197
|
|
|
|
3,788
|
|
Current portion
|
|
$
|
809,197
|
|
|
$
|
3,788
|
|
2018 Transactions
February 2018 Notes
On February 7, 2018, the Company issued two convertible notes (the “February 2018 Notes”), each in the principal amount of $87,500. The two February 2018 Notes contained substantially the same terms. The February 2018 Notes and accrued interest were convertible, at the option of the holders, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The notes bore interest at 8% per year and matured on February 7, 2019. The February 2018 Notes contained original issue discount aggregating $17,500 which has been amortized over the life of the February 2018 Notes. The Company has also incurred aggregate legal costs of $7,500 related to the notes. These costs have also been amortized over the life of the February 2018 Notes. The Company received cash proceeds of $150,000 from the February 2018 Notes.
These February 2018 Notes were redeemed during the third quarter of 2018. As a result of the extinguishment of the debt and the related derivative liabilities, we recorded a gain of $154,047.
March 2018 Note
On March 12, 2018, the Company issued a convertible note, in the principal amount of $100,000 (the “March 2018 Note”). The March 2018 Note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. The March 2018 Note provides for an interest payment of 10% of the principal amount of the March 2018 Note, payable before or upon maturity. The March 2018 Note matured six months from the effective date of March 12, 2018. The March 2018 Note contains original issue discount of $20,000, payable at maturity, which has been amortized over the life of the note. The Company has also incurred aggregate legal costs of $6,000 related to the March 2018 Note. These costs have also been amortized over the life of the March 2018 Note. The Company received cash proceeds of $100,000 from the March 2018 Note.
On September 18, 2018, the amount of the original issue discount of $20,000, 10% interest and legal costs of $6,000 were repaid to extend the maturity date of the March 2018 Note to March 18, 2019. We incurred additional original issue discount of $20,000, 10% interest and legal costs of $6,000 as a result of the extension. These costs are being amortized over the life of the March 2018 Note.
April 2018 Notes
On April 4, 2018, the Company issued a convertible note, in the principal amount of $75,000. This note and accrued interest were convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provided for an interest payment of 10% of the principal amount of the note, payable before or upon maturity. This note matured six months from the effective date of April 4, 2018. The note contained original issue discount of $15,000, payable at maturity, which has been amortized over the life of the note. The Company has also incurred aggregate legal costs of $6,000 related to the note. These costs have also been amortized over the life of this note. The Company received cash proceeds of $75,000. The note, interest and costs were paid at maturity.
On April 30, 2018, the Company issued a convertible note, in the principal amount of $150,000. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. The note provides for an interest payment of 10% of the principal amount of the note, payable before or upon maturity. The note matures six months from the effective date of April 30, 2018. The note contains original issue discount of $30,000, payable at maturity, which is being amortized over the life of the note. The Company has also incurred aggregate legal costs of $9,000 related to the note. These costs are also being amortized over the life of the note. The Company received cash proceeds of $150,000. At maturity, the amount of the original issue discount of $30,000, 10% interest and legal costs of $9,000 was paid to extend the maturity date of the note to January 31, 2019. We incurred additional original issue discount of $15,000, 5% interest and legal costs of $4,500 as a result of the extension, payable at maturity. These costs are being amortized over the life of the new note.
June 2018 Notes
On June 1, 2018, the Company issued a convertible note, in the principal amount of $50,000. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provided for an interest payment of 10% of the principal amount of this note, payable before or upon maturity. This note matured six months from the effective date of June 1, 2018. This note contained original issue discount of $10,000, payable at maturity, which has been amortized over the life of the note. The Company has also incurred aggregate legal costs of $3,000 related to the note. These costs have also been amortized over the life of this note. The Company received cash proceeds of $50,000. In March 2019, the maturity date of the note was extended to August 15, 2019, effective as of the original maturity date. As consideration for the extension, we have agreed to issue one million shares of common stock for each month that the note is outstanding, commencing in April 2019.
On June 6, 2018, the Company issued a convertible note, in the principal amount of $100,000. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for an interest payment of 10% of the principal amount of this note, payable before or upon maturity. This note matures six months from the effective date of June 6, 2018. This note contains original issue discount of $20,000, payable at maturity, which is being amortized over the life of this note. The Company has also incurred aggregate legal costs of $6,000 related to the note. These costs have been amortized over the life of this note. The Company received cash proceeds of $100,000. In March 2019, the maturity date of the note was extended to August 15, 2019, effective as of the original maturity date. As consideration for the extension, we have agreed to issue one million shares of common stock for each month that the note is outstanding, commencing in April 2019.
On June 7, 2018, the Company issued a convertible note, in the principal amount of $100,000. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for an interest payment of 10% of the principal amount of this note, payable before or upon maturity. This note matures six months from the effective date of June 7, 2018. This note contains original issue discount of $20,000, payable at maturity, which is being amortized over the life of this note. The Company has also incurred aggregate legal costs of $6,000 related to the note. These costs are also being amortized over the life of this note. The Company received cash proceeds of $100,000. At maturity, the amount of the original issue discount of $20,000, 10% interest and legal costs of $6,000 was paid and a new note issued to extend the maturity date of the note to September 4, 2019. We incurred additional original issue discount of $3,000 (face amount of the new note is $103,000) and the new note bears interest at 10% per year. The $3,000 addition to the note is being amortized over the life of the new note.
On June 22, 2018, the Company issued a convertible note (the “June 22, 2018 Note”), in the principal amount of $89,250. The June 22, 2018 Note and accrued interest are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The June 22, 2018 Note bears interest at 8% per year and matures on June 4, 2019. The Company has also incurred aggregate legal costs of $4,250 related to the June 22, 2018 Note. These costs are also being amortized over the life of the June 22, 2018 Note. The Company received cash proceeds of $85,000.
July 2018 Note
On July 18, 2018, the Company issued a convertible note (the “July 2018 Note”), with a face amount of $100,000. This note and accrued interest are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. This note bears interest at 10% per year and matures on July 10, 2019. The Company has also incurred aggregate legal costs of $5,000 related to the note. These costs are also being amortized over the life of this note. The Company received cash proceeds of $95,000.
August 2018 Notes
On August 13, 2018, the Company issued a convertible note, in the principal amount of $100,000. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for an interest payment of 10% of the principal amount of the note, payable before or upon maturity. This note matures six months from the effective date of August 13, 2018. This note contains original issue discount of $20,000, payable at maturity, which is being amortized over the life of this note. The Company has also incurred aggregate legal costs of $6,000 related to the note. These costs are also being amortized over the life of this note. The Company received cash proceeds of $100,000.
On August 28, 2018, the Company entered an agreement for a short-term loan, with a principal amount of $59,132. The agreement provides for an interest payment of 8% of the principal amount of the note, payable before or upon maturity. The note matures twelve business days from the effective date of August 28, 2018. The Company received cash proceeds of $59,132. The note was repaid on September 21, 2018.
September 2018 Notes
On September 17, 2018, the Company issued a convertible note (the “September 2018 Note”), in the principal amount of $131,250. The September 2018 Note and related accrued interest are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The September 2018 Note bears interest at 8% per year and matures on September 12, 2019. The Company has also incurred aggregate finance costs of $13,125 and legal costs of $6,250 related to the September 2018 Note. These costs are also being amortized over the life of the September 2018 Note. The Company received cash proceeds of $125,000.
On September 18, 2018, the Company issued a convertible note, in the principal amount of $100,000, to replace a note issued in March 2018 as discussed above. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for an interest payment of 10% of the principal amount of the note, payable before or upon maturity. This note matures six months from the effective date of September 18, 2018. This note contains original issue discount of $20,000, payable at maturity, which is being amortized over the life of this note. The Company has also incurred aggregate legal costs of $6,000 related to the note. These costs are also being amortized over the life of this note.
October 2018 Notes
On October 5, 2018, the Company issued a convertible note (the “October 2018 Note”), in the principal amount of $135,000. The October 2018 Notes and related accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The note bears interest at 8% per year and matures on September 28, 2019. The October 2018 Note contained original issue discount aggregating $10,000 which is being amortized over the life of the October 2018 Note. The Company received cash proceeds of $125,000.
On October 31, 2018, the Company issued a convertible note, in the principal amount of $150,000, to replace a note issued in April 2018 as discussed above. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for an interest payment of 5% of the principal amount of the note, payable before or upon maturity. This note matures January 31, 2019. This note contains original issue discount of $15,000, payable at maturity, which is being amortized over the life of this note. The Company has also incurred aggregate legal costs of $4,500 related to the note. These costs are also being amortized over the life of this note.
November 2018 Notes
On November 7, 2018, the Company issued a convertible note (the “November 2018 Note”), in the principal amount of $78,750. The November 2018 Note and related accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The November 2018 Note bears interest at 8% per year and matures on November 7, 2019. The Company has also incurred aggregate finance costs of $6,750 and legal costs of $3,750 related to the November 2018 Note. These costs are also being amortized over the life of the November 2018 Note. The Company received cash proceeds of $75,000.
On November 29, 2018, the Company issued a convertible note, in the principal amount of $50,000. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for an interest payment of 10% of the principal amount of the note, payable before or upon maturity. This note matures six months from the effective date of November 29, 2018. This note contains original issue discount of $10,000, payable at maturity, which is being amortized over the life of this note. The Company has also incurred aggregate legal costs of $3,000 related to the note. These costs are also being amortized over the life of this note. The Company received cash proceeds of $50,000.
December 2018 Note
On December 4, 2018, the Company issued a convertible note, in the principal amount of $103,000, to replace a note issued in June 2018 as discussed above. This note and accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $0.15 per share. This note provides for interest at 10% per year and matures on September 4, 2019. This note contains original issue discount of $3,000, payable at maturity, which is being amortized over the life of this note.
On December 7, 2018, the Company issued a convertible note (the “December 2018 Note”), with a face amount of $100,000. This note and related accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. This note bears interest at 10% per year and matures on December 7, 2019. The Company has also incurred aggregate legal costs of $5,000 related to the note. These costs are also being amortized over the life of this note. The Company received cash proceeds of $95,000.
During 2018, the Company amortized $343,882 of debt discount and $38,803 of debt issue costs to interest expense. Unamortized debt discount and debt costs of $134,219 and $5,554, respectively, were charged against gain on extinguishment of debt at the time of redemption. At December 31, 2018, unamortized debt discount was $440,315 and unamortized debt issue costs were $34,738.
2017 Transactions
On April 21, 2017, the Company issued a convertible note in the amount of $100,000. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a per share price of $0.03, subject to adjustment as provided in the note. The note matures on April 21, 2020. The note contained original issue discount of $10,000 which is being amortized over the life of the note. The Company has also incurred costs of $27,500 related to the note, consisting of $5,000 of legal costs and $22,500 for a commitment fee. These costs are also being amortized over the life of the note. The commitment fee was paid with 750,000 shares of common stock with a value of $22,500. The Company also recorded debt discount of $90,000 related to the embedded derivative, as described in Note 9, which is being amortized over the life of the note.
On May 17, 2017, the Company issued two convertible notes, each with a face amount of $135,712. The notes contain substantially the same terms. The notes and related accrued interest are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The notes bear interest at 8% per year and mature on May 17, 2018. The notes contained original issue discount aggregating of $24,675 which is being amortized over the life of the notes. The Company has also incurred aggregate legal costs of $11,750 related to the notes. These costs are also being amortized over the life of the notes. The Company also recorded debt discount of $246,750 related to the embedded derivative, as described in Note 9 which is being amortized over the life of the note.
The above notes were redeemed during the fourth quarter of 2017. As a result of the extinguishment of the debt and the related derivative liabilities, we recorded a gain of $696,261.
On October 31, 2017, the Company issued a convertible note in the amount of $100,000. The note and related accrued interest are convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The note bears interest at 8% per year and matures on October 31, 2018. The Company incurred legal costs of $5,000 related to the note which are being amortized over the life of the note. The Company also recorded debt discount of $100,000 related to the embedded derivative, as described in Note 9, which is being amortized over the life of the note.
The note was redeemed during the second quarter of 2018. As a result of the extinguishment of the debt and the related derivative liabilities, we recorded a gain of $195,675.
During 2017, the Company amortized $170,633 of debt discount and $11,021 of debt issue costs to interest expense. Unamortized debt discount and debt costs of $209,125 and $28,684, respectively, were charged against gain on extinguishment of debt at the time of redemption. At December 31, 2017, unamortized debt discount was $91,667 and unamortized debt issue costs were $4,545.
Note 9. Derivative Liabilities
The Company has identified certain embedded derivatives related to its convertible notes. Since the notes are convertible into a variable number of shares or have a price reset feature, the conversion features of those notes are 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.
December 2018 Note
The Company identified embedded derivatives related to the conversion features of the December 2018 Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $142,108, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 2.68%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 259%; and (4) an expected life of 1 year. The initial fair value of the embedded debt derivative was allocated $100,000 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $42,109 charged to expense at issue date as non-cash interest expense.
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 $1,414 for the year ended December 31, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $64,321 related to the change in the fair value of the derivative. The fair value of the embedded derivative was $207,843 at December 31, 2018, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.63%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 219%; and (4) an expected life of 11 months.
November 2018 Note
The Company identified embedded derivatives related to the conversion features of the November 2018 Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $113,398, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 2.74%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 268%; and (4) an expected life of 1 year. The initial fair value of the embedded debt derivative was allocated $78,750 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $34,648 charged to expense at issue date as non-cash interest expense.
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 $1,930 for the year ended December 31, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $48,931 related to the change in the fair value of the derivative. The fair value of the embedded derivative was $164,259 at December 31, 2018, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.60%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 229%; and (4) an expected life of 10 months.
October 2018 Note
The Company identified embedded derivatives related to the conversion features of the October 2018 Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $195,992, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 2.64%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 274%; and (4) an expected life of 1 year. The initial fair value of the embedded debt derivative was allocated $125,000 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $70,992 charged to expense at issue date as non-cash interest expense.
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 $5,296 for the year ended December 31, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $78,573 related to the change in the fair value of the derivative. The fair value of the embedded derivative was $279,861 at December 31, 2018, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.60%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 232%; and (4) an expected life of 9 months.
September 2018 Note
The Company identified embedded derivatives related to the conversion features of the September 2018 Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $194,417, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 2.56%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 290%; and (4) an expected life of 1 year. The initial fair value of the embedded debt derivative was allocated $131,250 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $63,167 charged to expense at issue date as non-cash interest expense.
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 $6,288 for the year ended December 30, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $64,052 related to the change in the fair value of the derivative. The fair value of the embedded derivative was $264,757 at December 31, 2018, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.60%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 217%; and (4) an expected life of 8.5 months.
July 2018 Note
The Company identified embedded derivatives related to the conversion features of the July 2018 Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $152,814, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 2.36%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 320%; and (4) an expected life of 1 year. The initial fair value of the embedded debt derivative was allocated 100,000 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $52,814 charged to expense at issue date as non-cash interest expense.
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 $8,800 for the year ended December 31, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $31,881 related to the change in the fair value of the derivative. The fair value of the embedded derivative was $193,495 at December 31, 2018, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.56%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 213%; and (4) an expected life of 6 months.
June 2018 Note
The Company identified embedded derivatives related to the conversion features of the June 22, 2018 Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $158,278, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 2.33%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 319%; and (4) an expected life of 11 months. The initial fair value of the embedded debt derivative was allocated 89,250 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $69,028 charged to expense at issue date as non-cash interest expense.
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 $6,659 for the year ended December 31, 2018, respectively, and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $5,036, related to the change in the fair value of the derivative. The fair value of the embedded derivative was $169,973 at December 31, 2018, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.56%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 226%; and (4) an expected life of 5 months.
February 2018 Notes
The Company identified embedded derivatives related to the conversion features of the February 2018 Notes. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the notes as $283,719, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 1.91%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 420%; and (4) an expected life of 1 year. The initial fair value of the embedded debt derivative was allocated $175,000 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $108,719 charged to expense at issue date as non-cash interest expense.
The Company has recorded additions to the derivative conversion liabilities related to the conversion feature attributable to interest accrued during the periods. These additions totaled $12,833 year ended December 31, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded income of $342, respectively, related to the change in the fair value of the derivative. The fair value of the embedded derivative was $296,210 at the time of the redemption of the underlying debt, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.25%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 238%; and (4) an expected life of 5.25 months. This amount has been credited to gain on extinguishment upon redemption.
October 2017 Note
The Company identified embedded derivatives related to the conversion features of the October Note. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the Dais derivatives as of the inception date of the note and to adjust the fair value as of each subsequent balance sheet date. The Company calculated the fair value of the embedded derivative at the inception of the note as $324,426, using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 1.61%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 407%; and (4) an expected life of 11 months. The initial fair value of the embedded debt derivative was allocated $100,000 as debt discount, which will be amortized to interest expense over the original term of the note, with the balance of $224,426 charged to expense at issue date as non-cash interest expense during the year ended December 31, 2017.
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 $8,514 for the year ended December 31, 2018 and were charged to interest expense.
During the year ended December 31, 2018, the Company recorded expense of $29,931 related to the change in the fair value of the derivative. The fair value of the embedded derivative was $281,946 at the time of the redemption of the underlying debt, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 2.12%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 270%; and (4) an expected life of 7.5 months. This amount has been credited to gain on extinguishment upon redemption.
Note 10. 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 11,093,886 and 15,000,000 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 10,000,000. The Plans and the 2015 Plan permit grants of options to purchase common shares authorized and approved by the Company’s Board of Directors.
There were no stock options issued to consultants during the year ended December 31, 2018 and 2017.
The following summarizes the information relating to outstanding stock options activity during 2018 and 2017:
|
|
Common Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contractual
Term
(in years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2016
|
|
|
18,842,558
|
|
|
$
|
0.25
|
|
|
|
5.06
|
|
|
$
|
-
|
|
Granted
|
|
|
10,150,000
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(2,100,000
|
)
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
26,892,558
|
|
|
|
0.17
|
|
|
|
6.42
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(2,000,000
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
24,892,558
|
|
|
$
|
0.17
|
|
|
|
5.5
|
|
|
$
|
-
|
|
Exercisable at December 31, 2018
|
|
|
24,892,558
|
|
|
$
|
0.17
|
|
|
|
5.5
|
|
|
$
|
-
|
|
Stock compensation expense related to options was $0 and $332,966 for the years ended December 31, 2018 and 2017, respectively. The weighted average fair value of options granted at market during 2017 was $0.04 per option. The Company calculated the fair value of the 2017 options using the Black Scholes model with the following assumptions: (1) risk free rate of 2.24%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company's common stock of 185%; and (4) an expected life of 10 years. The exercise price is $0.04 for the options granted in 2017. As of December 31, 2018, there was no of unrecognized employee stock-based compensation expense related to non-vested stock options.
Warrants
At December 31, 2018, 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, 2016
|
|
|
5,585,358
|
|
|
|
1.01
|
|
|
$
|
0.34
|
|
Granted
|
|
|
26,250,000
|
|
|
|
|
|
|
|
0.01
|
|
Forfeited or expired
|
|
|
(4,375,000
|
)
|
|
|
|
|
|
|
-
|
|
Warrants at December 31, 2017
|
|
|
27,460,358
|
|
|
|
9.29
|
|
|
$
|
0.03
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(1,210,358
|
)
|
|
|
|
|
|
|
0.48
|
|
Warrants at December 31, 2018
|
|
|
26,250,000
|
|
|
|
8.70
|
|
|
$
|
0.01
|
|
Note 11. Deferred Revenue
In December 2017, the Company and Zhejiang MENRED Environmental Tech Co, Ltd., Zhejiang Province, China (“Menred”), entered into a 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 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 License and Supply 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 License and Supply Agreement. Also pursuant to the License and Supply 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 License and Supply Agreement has a ten-year term with mutually agreed upon five-year extensions.
The Company recognized license revenue of $50,000 and $1,344 for the years ended December 31, 2018, respectively. Deferred revenue for the agreement was $448,656 and $498,656 at December 31, 2018 and 2017, respectively. The Company recognized royalty revenue of $0 for the years ended December 31, 2018 and 2017.
Note 12. Commitments and Contingencies
The Company has employment agreements with some of its key employees and executives. These agreements provide for minimum levels of compensation during current and future years. In addition, these agreements call for grants of stock options and for payments upon termination of the agreements.
The Company entered into an amended and restated employment agreement with Mr. Timothy N. Tangredi, the Company’s President, Chief Executive Officer, and director, dated as of September 14, 2011. Mr. Tangredi’s employment agreement provides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two year period and on each subsequent anniversary of the commencement date for an additional year. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to his current base salary multiplied by one third of the percentage increase in the Company’s yearly revenue compared to the Company’s prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of the board of directors or compensation committee (if applicable). Additionally, at the discretion of the Company’s board of directors and its compensation committee, Mr. Tangredi may be eligible for an annual bonus, if any, of up to 100% of his then-effective base salary, if he meets or exceeds certain annual performance goals established by the board of directors. In addition to this bonus, Mr. Tangredi may be eligible for a separate merit bonus if approved by the board of directors, for specific extraordinary events or achievements such as a sale of a division, major license or distribution arrangement or merger. Mr. Tangredi is entitled to medical, disability and life insurance, as well as six weeks of paid time off annually, an automobile allowance, reimbursement of all reasonable business expenses, automobile insurance and maintenance, and executive conference or educational expenses.
Under his employment agreement, in addition to any other compensation which he may receive, if the Company completes a secondary public offering, Mr. Tangredi will be granted an option to purchase up to 520,000 shares of the Company’s common stock with an exercise price equal to the fair market value per share on the date of grant. This option will become vested and exercisable in thirds, with one third vested upon grant, another third at the one-year anniversary of the grant, and another third upon the second anniversary of the grant. The option shall have a term of ten years, shall be exercisable for up to three years after termination of employment (unless termination is for cause, in which event it shall expire on the date of termination), shall have a “cashless” exercise feature, and shall be subject to such additional terms and conditions as are then applicable to options granted under such plan provided they do not conflict with the terms set forth in the agreement.
If Mr. Tangredi’s employment is terminated for any reason, the Company’s will be obligated to pay him his accrued but unpaid base salary, bonus and accrued vacation pay, and any unreimbursed expenses (“Accrued Sums”).
In addition to any Accrued Sums owed, if Mr. Tangredi’s employment is terminated by the Company in the event of his disability or without cause or by Mr. Tangredi for good reason, he shall be entitled to:
(i)
|
an amount equal to the sum of (A) the greater of 150% of the base salary then in effect or $320,000 plus (B) the cash bonus and/or merit bonus, if any, awarded for the most recent year;
|
(ii)
|
health and life insurance, a car allowance and other benefits set forth in the agreement until two years following termination of employment, and thereafter to the extent required by COBRA or similar statute; and
|
(iii)
|
all stock options, to the extent they were not exercisable at the time of termination of employment, shall become exercisable in full.
|
In addition to any Accrued Sum owed, in the event of termination upon death, Mr. Tangredi shall be entitled to (i) and (iii) above.
In addition to any Accrued Sums owed, in the event that Mr. Tangredi elects to terminate employment within one year following a change in control, he shall receive a lump sum payment equal to the sum of (a) the greater of his then current base salary or $210,000 plus (b) the cash bonus and merit bonus, if any, awarded in the most recent year. In addition, he will be entitled to (ii) and (iii) above.
The employment agreement also contains customary covenants restricting the use of the Company’s confidential information and solicitation of employees, which are similarly applicable to other executive officers. In addition the Company is obligated to indemnify Mr. Tangredi for any claims made against him in connection with his employment with the Company, to advance indemnification expenses, and maintain his coverage under the Company’s directors’ and officers’ liability insurance policy.
Under the employment agreement, the Company and Mr. Tangredi have agreed that the Company will retain an independent compensation consultant, which may modify the compensation program for Mr. Tangredi and other officers, subject to certain conditions including approval of the board of directors. Notwithstanding the recommendation and board consideration, Mr. Tangredi has the right to continue the current terms of the employment agreement.
On February 27, 2015, the Company and Mr. Tangredi entered into an 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 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 as a result of the conversion. 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 or a person or group initiate a tender offer for the Company's common stock, Mr. Tangredi may convert unpaid compensation to Class A Convertible Preferred Stock of the Company at $1.50 per share. The Board of Directors waived the requirement to convert $100,000 of unpaid compensation into common stock during 2018 and 2017. No amounts have been converted under this agreement to date.
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 the third quarter of 2015, the Company commenced an action for the cancellation of the 37,500,000 shares issued to Soex (the “Shares”) in connection with a Securities Purchase Agreement, dated January 21, 2014 (“Soex SPA”), and 3,750,000 shares issued to Zan Investment Advisory Limited (“Zan”), which is affiliated with Soex through Aifan Liu, who was appointed as a Company board observer by SOEX and her husband, Xinghong Hua. Sharon Han, General Manager and Chairwoman of Soex, served on our board pursuant to the provisions of the Soex SPA. Ms. Han resigned from the Board of Directors effective February 1, 2016.
On April 24, 2014, we entered into a Distribution Agreement (the “Distribution Agreement”), with Soex to distribute certain of the Company’s products in China. As reported in the Company’s Form 10-K for the year ended December 31, 2014 and filed with the Securities and Exchange Commission on April 1, 2015, the Company was entitled to receive, pursuant to the Distribution Agreement, royalties and a $500,000 payment, of which $50,000 has been received, that was due on or before October 24, 2014. Further, the Company reported it had not received any royalties from Soex. Soex is in breach of the Distribution Agreement.
As first reported in the Company’s Form 10-Q for the quarter ended June 30, 2015, the Company began pursuing legal action against Soex for breach of the Soex SPA and Distribution Agreement. On July 8, 2015, the Company filed a lawsuit in state courts in Florida against Soex and Zan.
Pursuant to the Distribution Agreement, Soex is in material breach of the following:
|
(1)
|
Section 1(a) of the Distribution Agreement for Soex’s failure to make a $225,000 payment to the Company for the appointment of Soex as the exclusive distributor of the Products in the Field and Territory (the “Distribution Payment Default”) in accordance with the terms set forth in the Distribution Agreement. Such payment was due on October 20, 2014 (the “Payment Date”).
|
|
|
|
|
(2)
|
Section 8(b) of the Distribution Agreement for Soex’s failure to make a $225,000 payment to the Company for the grant of the license and right to manufacture, sell, lease and distribute Products (excluding manufacture of MTM), and to use the Intellectual Property in connection therewith (the “License Payment Default” and, together with the Distribution Payment Default, the “Payment Default”) in accordance with the terms set forth in the Distribution Agreement. Such payment was due on the Payment Date.
|
|
|
|
|
(3)
|
Section 15(b) of the Distribution Agreement for Soex’s failure to issue to the Company 25% of the equity (the “Equity Default”) of SOEX (Beijing) Environmental Protection Technology Company Limited (the “China Subsidiary”).
|
As a result of the above, we terminated the Soex Distribution Agreement. As provided in Section 14(e) of the Soex Distribution Agreement, the Company has the right to enforce any obligation due to us by Soex. As a result, Soex still must (a) pay the remaining $450,000 due under the Distribution Agreement and the amount of Royalties due, plus interest at 1.5% per month (18% per year) with interest accruing from the date that payment was due and (b) issue to us 25% of the equity of SOEX (Beijing) Environmental Protection Technology Company Limited. As provided in Section 14(b), neither us nor Soex shall be liable for compensation, reimbursement or damages due to loss of profits on sales or anticipated sales or losses due to expenditures, investments or commitments made or in connection with the establishment, development or maintenance of the business.
The Soex Litigation was moved to the U.S. District Court for the Middle District of Florida where Soex has instituted a counterclaim (Civil Docket Case #: 8:15-CV-02362-MSS-EAJ). On September 19, 2018, a pre-trial conference was held in Tampa finding a trial date set for October 22, 2018. The trial for the original case was held between October 22 and 24, 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 law suit 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-gong 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.
Note 13. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), a tax reform bill, was enacted. The Act, among other items, reduces the current federal income tax rate to 21% from 35%. The rate reduction is effective January 1, 2018 and is permanent.
The Act has caused the Company’s deferred income taxes to be revalued based upon the tax rate reduction from 35% to 21%. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
As a result of the reduction of the federal corporate income tax rate, the Company reduced the value of its net deferred tax asset by $4,126,000 which was recorded as a corresponding reduction to the valuation allowance during the fourth quarter of 2017.
The Company had, subject to limitation, approximately $29,800,000 of net operating loss carryforwards at December 31, 2018, which will expire at various dates beginning in 2019 through 2037. In addition, the Company has research and development tax credits of approximately $333,000 at December 31, 2018 available to offset future taxable income, which will expire from 2030 through 2037. 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 increased by approximately $600,000 and $671,000 for the years ended December 31, 2018 and 2017, respectively. Significant components of deferred tax assets and liabilities are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred revenue
|
|
$
|
114,000
|
|
|
$
|
126,000
|
|
Depreciation
|
|
|
6,000
|
|
|
|
6,000
|
|
Accrued compensation
|
|
|
477,000
|
|
|
|
432,000
|
|
Research and development credit
|
|
|
333,000
|
|
|
|
308,000
|
|
Accrued warranty and interest expense
|
|
|
86,000
|
|
|
|
46,000
|
|
Net operating loss carryforward
|
|
|
7,551,000
|
|
|
|
7,049,000
|
|
Valuation allowance
|
|
|
(8,567,000
|
)
|
|
|
(7,967,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal statutory income tax rate
|
|
|
(21.0
|
)%
|
|
|
(35.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
(4.3
|
)
|
|
|
(4.0
|
)
|
Permanent differences
|
|
|
6.3
|
|
|
|
10.4
|
|
Change in valuation allowance
|
|
|
19.0
|
|
|
|
28.6
|
|
Provision for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As of December 31, 2018, 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 as a result of the ownership change percentages during 2018 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 2015 through 2018.
Note 14. Subsequent Events
No material events have occurred after December 31, 2018 that requires recognition or disclosure in the financial statements except as follows:
On January 28, 2019, the Company entered into a Seventeenth Amendment of the Loan and Security Agreement with a related party (described in Note 6), whereby the Maturity Date of the Note was extended to 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) April 8, 2019. In consideration of the extension of maturity date, the Company will issue 20,000 shares of common stock.
On February 20, 2019, the Company issued convertible notes, with a face amount of $155,000. The notes contain substantially the same terms. The notes and related accrued interest are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion price of 60% of the lowest trading price for 15 days prior to conversion. The notes bear interest at 8% per year and mature on February 20, 2020. The notes contain original issue discount aggregating $12,500 which is being amortized over the life of the notes. costs are also being amortized over the life of the notes. The Company received cash proceeds of $142,500.
On February 21, 2019, Dais Analytic Corporation Inc. (the “Company”) filed a Certificate of Amendment to its Certificate of Incorporation (the “Charter Amendment”) changing the Company’s name to Dais Corporation (the “Name Change”). On February 26, 2019, the Company received notice from Financial Industry Regulatory Authority (“FINRA”) that the Name Change had been approved and would take effect at the opening of trading on February 27, 2019.
On February 21, 2019 the Company amended its Certificate of Incorporation to authorize the issuance of a total number of shares to be 350,000,000, consisting of 340,000,000 shares of common stock, having a par value of $0.01 per share, and 10,000,000 shares of preferred stock, having a par value of $0.01 per share.
On March 18, 2019, the Company signed a letter to extend the maturity date to August 15, 2019 of two convertible notes. In exchange the company would pay a minimum of $1,000 per month against the total sum owed and 1 Million shares of common stock each month until the notes are paid in full.
On March 18, 2019, the Company signed a letter to extend the maturity date to August 15, 2019 of convertible notes dated June 6, 2018, August 13, 2018 and October 31, 2018. In exchange the company would pay a minimum of $1,000 per month against the total sum owed and 1 Million shares of common stock each month until the notes are paid in full.
During February 7, 2019 to March 20, 2019 there were 8,853,398 common shares issued as part of conversion shares in accordance with terms of a $100,000 convertible redeemable note that was due in December 2018.
On March 14, 2019, the Company received a written consent in lieu of a meeting in accordance with the New York Business Corporations Act by the holders of 51% of the voting power of the Common Stock authorizing approval of increasing the number of shares of Common Stock the Company is authorized to issue from 340,000,000 to 1,100,000,000.