Notes
to Condensed Financial Statements
March 31, 2022 and 2021
Note 1 - Nature of Business and Liquidity
Amesite Inc. (the “Company”)
was incorporated in November 2017. The Company is an artificial intelligence driven platform and course designer, that provides customized,
high performance and scalable online products for schools and businesses. The Company uses machine learning to provide a novel, mass customized
experience to learners. The Company’s customers are businesses, universities and colleges, and K-12 schools. The Company’s
activities are subject to significant risks and uncertainties. The Company’s operations are considered to be in one segment.
On September 18, 2020, we consummated
a reorganizational merger, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated July 14, 2020 (“Effective
Date”), whereby we merged with and into Amesite Inc. (“Amesite Parent”) our former parent corporation, with our Company
resulting as the surviving entity. In connection with the same, we filed a Certificate of Ownership and Merger with the Secretary of State
of the State of Delaware, and changed our name from “Amesite Operating Company” to “Amesite Inc.” The stockholders
of Amesite Parent approved the Merger Agreement on August 4, 2020. The directors and officers of Amesite Parent became our directors and
officers.
Pursuant to the Merger Agreement, on
the Effective Date, each share of the Amesite parent’s common stock, $0.0001 par value per share, issued and outstanding immediately
before the Effective Date, was converted, on a one-for-one basis, into shares of our common stock.
Additionally, each option or warrant
to acquire shares of Amesite Parent outstanding immediately before the Effective Date was converted into and became an equivalent option
to acquire shares of our common stock, upon the same terms and conditions.
Going Concern
The accompanying
condensed financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going
concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company is in the early stages of developing its customer base and has not completed its efforts to establish a stabilized source
of revenue sufficient to cover its costs over an extended period of time.
The Company does not have sufficient
cash on hand or available liquidity to maintain operations for at least twelve months from the date of issuance of the condensed financial
statements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In response to the
conditions, management plans include raising capital through equity financing, or by selling additional shares to Lincoln Park Capital
per the Purchase Agreement (Note 5) or by completing other offerings of common stock. However, these plans are subject to market
conditions, and are not within the Company’s control, and therefore, cannot be deemed probable. There is no assurance that the Company
will be successful in implementing its business plan, generate sufficient cash from operations or sell
stock on favorable terms or at all. As a result, the Company has concluded that management’s plans do not alleviate
substantial doubt about the Company’s ability to continue as a going concern.
The condensed financial statements do
not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Note 2 - Significant Accounting Policies
Basis of Presentation
The condensed financial statements of
the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and considering the requirements of the United States Securities and Exchange Commission (“SEC”). The Company has a fiscal
year with a June 30 year end.
In the opinion of management, the condensed
financial statements of the Company as of March 31, 2022 and 2021 and for the three and nine months ended March 31, 2022 and 2021 include
all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of
the results for the interim periods. These interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed in or omitted from this report pursuant
to the rules and regulations of the SEC. These financial statements should be read together with the condensed financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021.
Capitalized Software Costs
The Company capitalizes costs incurred
in the development of software for internal use, including the costs of the software, materials, consultants, and payroll and payroll
related costs for employees incurred in developing internal use computer software. Planning costs incurred prior to the development of
software and costs not qualifying for capitalization are charged to expense. The Company amortizes capitalized software over a period
of three years, which is the expected useful life of the software. The Company recognized amortization expense of approximately $658,357
and $525,000 for the nine months ended March 31, 2022 and 2021, respectively. The Company recognized amortization expense of approximately
$234,000 and $192,000 for the three months ended March 31, 2022 and 2021, respectively. Accumulated amortization on March 31, 2022 and
2021 was $1,996,137 and $1,129,186, respectively.
Revenue Recognition
We generate substantially all of our
revenue from contractual arrangements with businesses, colleges and universities, and non-profit organizations to provide a comprehensive
platform of integrated technology and technology enabled services related to product offerings.
Performance Obligations and Timing
of Recognition
A performance obligation is a promise
in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
We derive revenue from annual licensing
arrangements, including maintenance fees, setup fees and other variable fees for course development and miscellaneous items. Our contracts
with partners generally have two year terms and have a single performance obligation. The promises to set up and provide a hosted platform
of tightly integrated technology and services partners need to attract, enroll, educate and support students are not distinct within the
context of the contracts. This performance obligation is satisfied as the partners receive and consume benefits, which occurs ratably
over the contract term.
Occasionally, we will provide professional
services, such as custom development, non-complex implementation activities, training, and other various professional services. We evaluate
these services to determine if they are distinct and separately identifiable in the context of the contract. In our contracts with customers
that contain multiple performance obligations as a result of this assessment, we allocate the transaction price to each separate performance
obligation on a relative standalone selling price basis. Standalone selling prices of our solutions and services are typically estimated
based on observable transactions when the solutions or services are sold on a standalone basis. When standalone selling prices are not
observable, we utilize a cost plus margin approach to allocate the transaction price.
We do not disclose the value of unsatisfied
performance obligations because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service
that forms part of a single performance obligation (i.e., consideration received is based on the level of product offerings, which is
unknown in advance). For the three and nine months ended March 31, 2022 and 2021, all of the revenue recognized has been recognized over
the related contract periods. Additionally, for the three and nine months ended March 31, 2022, five customers comprised approximately
86% of total revenue. During the three and nine months ended March 31, 2021, one customer comprised approximately 76% and 54% of total
revenue, respectively.
We also receive fees that are fixed
in nature, such as annual license and maintenance charges, in place of or in conjunction with variable consideration. The fees are independent
of the number of students that are enrolled in courses with our customers and are allocated to and recognized ratably over the service
period of the contract that the Company’s platform is made available to the customer (i.e. the customer simultaneously receives
and consumes the benefit of the software over the contract service period).
The following factors affect the nature,
amount, timing, and uncertainty of our revenue and cash flows:
| ● | The
majority of our customers are private and public learning institutions across various domestic regions |
| ● | The
majority of our customers have annual payment terms |
Accounts Receivable, Contract Assets
and Liabilities
Balance sheet items related to contracts
consist of accounts receivable (net) and contract liabilities on our condensed balance sheets. Accounts receivable (net) is stated at
net realizable value, and we utilize the allowance method to provide for doubtful accounts based on management’s evaluation of the
collectability of the amounts due. Our estimates are reviewed and revised periodically based on historical collection experience and a
review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly
differed from prior estimates. There was no allowance for doubtful accounts on accounts receivable balances as of March 31, 2022 or June
30, 2021.
We may recognize revenue prior to billing
a customer when we have satisfied or partially satisfied our performance obligations as billings to our customers may not be made until
after the service period has commenced. As of March 31, 2022 and June 30, 2021, we do not have any contract assets.
Contract liabilities as of each balance
sheet date represent the excess of amounts billed or received as compared to amounts recognized in revenue on our condensed statements
of operations as of the end of the reporting period, and such amounts are reflected as a current liability on our condensed balance sheets
as deferred revenue. We generally receive payments prior to completion of the service period and our performance obligations. These payments
are recorded as deferred revenue until the services are delivered or until our obligations are otherwise met, at which time revenue is
recognized.
Some contracts also involve annual license
fees, for which upfront amounts are received from customers. In these contracts, the license fees received in advance of the platform’s
launch are recorded as contract liabilities.
The following table provides information
on the changes in the balance of contract liabilities for the nine months ended March 31:
| |
2022 | | |
2021 | |
Opening balance | |
$ | 333,200 | | |
$ | 380,000 | |
Billings | |
| 425,445 | | |
| 582,930 | |
Less revenue recognized from continuing operations (net of cancellations): | |
| (539,455 | ) | |
| (418,315 | ) |
Closing balance | |
$ | 219,190 | | |
$ | 544,615 | |
Revenue recognized during the nine months
ended March 31, 2022 and 2021 that was included in the deferred revenue balance that existed in the opening balance of each year was approximately
$539,455 and $417,415, respectively.
The deferred revenue balance as of March
31, 2022 is expected to be recognized over the next 12 months.
Net Loss per Share
Basic net loss per share is calculated
by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss
per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding during the
period, increased by potentially dilutive common shares (“dilutive securities”) that were outstanding during the period. Dilutive
securities include stock options and warrants granted, convertible debt, and convertible preferred stock. There were 3,208,024 and 2,910,125
potentially dilutive securities for the three and nine months ended March 31, 2022 and 2021, respectively.
Risks and Uncertainties
The Company operates in an industry
subject to rapid change. The Company’s operations will be subject to significant risk and uncertainties including financial, operational,
technological, and other risks associated with an early stage company, including the potential risk of business failure.
On March 11, 2020, the World Health
Organization declared the outbreak of a respiratory disease caused by a novel coronavirus as a “pandemic.” First identified
in late 2019 and known now as COVID-19, the outbreak has impacted thousands of individuals worldwide. In response, many countries, including
the United States, have implemented measures to combat the outbreak which have impacted global business operations. While management believes
the Company’s operations have not been significantly impacted, the Company continues to monitor the situation. In addition, while
the Company’s results of operations, cash flows and financial condition could be negatively impacted, the extent of the impact cannot
be reasonably estimated at this time.
Note 3 - Stock-Based Compensation
The Company’s Equity Incentive
Plan (the “Plan”) permits the grant of stock options, stock appreciation rights, restricted stock, or restricted stock units
to officers, employees, directors, consultants, agents, and independent contractors of the Company. The Company believes that such awards
better align the interests of its employees, directors, and consultants with those of its stockholders. Option awards are generally granted
with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest
over two years from the grant date and generally have ten-year contractual terms. Certain option awards provide for accelerated vesting
(as defined in the Plan).
The Company has reserved 4,600,000 shares
of common stock to be available for granting under the Plan.
The Company estimates the fair value
of each option award using a Black Scholes Model (“BSM”) that uses the weighted average assumptions included in the table
below. Expected volatilities are based on historical volatility of comparable companies. The Company uses historical data to estimate
option exercise within the valuation model or estimates the expected option exercise when historical data is unavailable. The risk-free
rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The
Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in
the foreseeable future. When calculating the amount of annual compensation expense, the Company has elected not to estimate forfeitures
and instead accounts for forfeitures as they occur.
The following table summarizes the assumptions
used for estimating the fair value of the stock options granted for the nine months ended:
| |
March 31,
2022 | | |
March 31,
2021 | |
Expected term (years) | |
| 10.00 | | |
| 6.00 | |
Risk-free interest rate | |
| 1.75 - 2.2 | % | |
| 0.12 | % |
Expected volatility | |
| 78% - 93 | % | |
| 45% - 46.3 | % |
Dividend yield | |
| 0 | % | |
| 0 | % |
A summary of option activity for the
nine months ended March 31, 2022 is presented below:
Options | |
Number of
Shares | | |
Weighted Average Exercise
Price | | |
Weighted
Average
Remaining Contractual
Term (in years) | |
Outstanding at July 1, 2021 | |
| 3,222,125 | | |
$ | 1.96 | | |
| 8.34 | |
Granted | |
| 125,024 | | |
| 1.76 | | |
| 9.51 | |
Cancelled | |
| (139,125 | ) | |
| 3.09 | | |
| 8.91 | |
Outstanding and expected to vest at March 31, 2022 | |
| 3,208,024 | | |
| 1.91 | | |
| 7.61 | |
The weighted-average grant-date fair
value of options granted during the nine months ended March 31, 2022 as $1.76. The options contained time-based vesting conditions satisfied
over four years from the grant date.
For the three months ended March 31,
2022 and 2021, the Company recognized $414,746 and $221,168, in expense related to the Plan, respectively. For the nine months ended March
31, 2022 and 2021, the Company recognized $1,226,357 and $650,656 in expense related to the Plan, respectively.
On September 28, 2021, the Board approved
certain stock awards to its board members in the form of stock options and restricted stock. The stock option awards are expected to vest
ratably over twelve-month period from beginning September 28, 2021 through September 28, 2022. The restricted stock awards are expected
to vest over a twelve-month period beginning July 1, 2021 through June 30, 2022. The total approved compensation was $172,702 in stock
options and $600,000 in restricted stock. The number of options was determined based on the fair value of the Company’s share price
as of the date of grant. The Company determined that there will be 337,078 of restricted shares issued upon vesting, based on the fair
value of the Company’s share price on the grant date.
Accordingly, $43,176 and $87,310 related
to the stock option grants made to the board members, was recognized as stock-based compensation expense for the three and nine months
ended March 31, 2022. The Company also recognized $150,000 and $450,000 as stock-based compensation expense related to the restricted
stock unit grants made to the board members for the three and nine months ended March 31, 2022, respectively. The cost related to the
grants made to board members is expected to be recognized through September of 2022.
As of March 31, 2022, there was approximately
$610,011 of total unrecognized compensation cost for employees and non-employees related to nonvested options. These costs are expected
to be recognized through March 2026.
Note 4 - Income Taxes
For the three and nine months ended
March 31, 2022 and prior periods since inception, the Company’s activities have not generated taxable income or tax liabilities.
Accordingly, the Company has not recognized an income tax benefit on the Condensed Statements of Operations for the nine months ended
March 31, 2022 and 2021.
The Company has
approximately $20,881,000 of net operating loss carryforwards available to reduce future income taxes, of which approximately
$17,000 of net operating loss carryforwards expire in 2037. Due to uncertainty as to the realization of the net operating loss
carryforwards and other deferred tax assets as a result of the Company’s limited operating history and operating losses since
inception, a full valuation allowance has been recorded against the Company’s deferred tax assets.
Note 5 - Common Stock
On September 25, 2020, the Company completed
an initial public offering (“Offering”) of 3,000,000 shares of its common stock, $0.0001 par value per share, at an offering
price of $5.00 per share (total net proceeds of approximately $12.8 million after underwriting discounts, commissions, and other offering
costs). In connection with the Offering, the Company agreed to issue five (5) year warrants to the underwriter to purchase five percent
(5%) of the number of common shares sold in the Offering for an exercise price equal to $6.00. Total warrants of 150,000 were issued to
the underwriter on September 29, 2020.
The Company measures the warrants using
the BSM to estimate their fair value. The fair value of the warrants issued in connection with the Offering was approximately $249,000
based on the following inputs and assumptions using the BSM: (i) expected stock price volatility of 45.00%; (ii) risk free interest rate
of .14%; and (iii) expected life of the warrants of 5 years. The warrants were fully vested on the date of grant and are included in offering
costs in the Statement of Stockholders’ Equity.
In connection with the Offering, the
Company converted its outstanding convertible notes payable into 1,127,872 shares of its common stock.
During fiscal year 2021, warrant holders
exercised 834,544 warrants on a cashless basis and received 488,728 shares of common stock.
On August 2, 2021, the Company entered
into a purchase agreement (the “Purchase Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), under
which, subject to specified terms and conditions, the Company may sell to Lincoln Park up to $16.5 million worth of common stock, par
value $0.0001 per share, from time to time during the term of the Purchase Agreement, which ends August 2, 2023.
In connection with
the Purchase Agreement, the Company entered into an introducing broker agreement with Laidlaw & Company (UK) Ltd. (“Laidlaw”),
pursuant to which the Company agreed to pay a cash fee to Laidlaw (the “Introductory Fee”) equal to (i) 8% of the amount
of the Initial Purchase, (ii) 8% of the amount of a one-time share request up to $1,000,000 (“Tranche Purchase”), if any,
and (iii) 4% of up to the next $13,500,000 (or up to $14,500,000 if the Tranche Purchase is not exercised).
Upon entering into the Purchase Agreement,
the Company sold 759,109 shares of common stock to Lincoln Park as an initial purchase for a total purchase price of $1,500,000 (the “Initial
Purchase”). The Company received net proceeds from the Initial Purchase of $1,360,000 after the payment of the Introductory Fee
and offering costs. As consideration for Lincoln Park’s commitment to purchase up to $16.5 million of shares of common stock under
the Purchase Agreement, the Company issued 152,715 shares of common stock to Lincoln Park. If Lincoln Park is requested to purchase additional
shares during the term of the Purchase Agreement, the requested shares, (“Regular Purchase”), are limited based on the current
share price of the Company’s common stock. If the average price is below $3.00 per share, the Company is limited to issuing 50,000
shares per request; if the share price is between $3.00 and $4.00 per share, the limit is 75,000 shares per request, if the share price
is between $4.00 and $5.00, the limit is 100,000 shares per request, and if the share price is above $5.00, the limit is 150,000 shares
per request. Requests for purchases are permitted daily as long as the Company’s stock price is above $0.50 per share. The price
for such regular purchases will be the lower of: (i) the lowest closing price of the Company’s common stock on the purchase date
for such Regular Purchase and (ii) the arithmetic average of the three (3) lowest closing prices of the Company’s common stock during
the ten (10) consecutive business days immediately preceding. Additionally, the Company may instruct Lincoln Park to purchase additional
shares of common stock that exceed the Regular Purchase limits (“Accelerated Purchase”). If the Company requests Lincoln Park
to make an Accelerated Purchase, the price per share is discounted from average historical closing prices.
The Company evaluated the contract that
includes the right to require Lincoln Park to purchase additional shares of common stock in the future (“put right”) considering
the guidance in ASC 815-40, “Derivatives and Hedging — Contracts on an Entity’s Own Equity” (“ASC 815-40”)
and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value
accounting. The Company has analyzed the terms of the put right and has concluded that it has no value as of March 31, 2022.
On February 11, 2022, the Company entered
into an underwriting agreement with Laidlaw, as representative of the several underwriters, to issue and sell up to 3,437,500 shares of
the Company’s common stock, at a public offering price of $0.80 per share. On February 14, 2022, the Company entered into an amended
and restated underwriting agreement in order to increase the number of shares sold in the offering to 3,750,000. On February 16, 2022,
the Company closed the offering, and sold 3,750,000 shares of common stock to Laidlaw for total gross proceeds of $3,000,000.
After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $2,509,550.
Note
6 - Convertible Notes Payable
In
April and May 2020, the Company issued unsecured, convertible notes payable (the “Notes”) to certain accredited investors,
with an aggregate principal amount of $2,182,500, in an offering intended to be exempt from registration under the Securities Act of 1933,
as amended, pursuant to Section 4(a)(2) thereof and Regulation D thereunder.
The
Notes were unsecured, bore interest at 8% per annum, and matured one year from their dates of issuance. The Notes were
subject to automatic conversion into the Company’s common stock upon a qualified equity financing or change of control, based on
a specified formula for the conversion price; using the lesser of $2.00 or 75% of the price paid per share in either of the conversion
events.
The
Company incurred issuance costs of $261,900. The issuance costs were amortized over six months, which was the estimated length of time
that the Company believed the Notes would be outstanding until a conversion event occurred.
In
connection with the Offering (Note 5), the Notes (totaling $2,255,815, including accrued interest) were converted into 1,127,872 shares
of common stock at $2.00 per share. As the Offering price was $5.00 per share, the Company recognized an expense totaling $3,383,546
which represents the discount provided to the Note holders. This expense is recorded within interest expense in the condensed statement
of operations. Additionally, upon completion of the Offering, the remaining unamortized debt issuance costs of $182,900 were fully
amortized and included within interest expense.
Note 7 - Subsequent Events
The
Company has evaluated subsequent events through the date of filing this Quarterly Report on Form 10-Q and determined that no material
events occurred.