UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2020

For the transition period from _______ to _______

Commission File No. 000-53554

Registrant’s telephone number, including area code: (727) 375-8484

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 278,128 shares of the Registrant’s $0.01 par value common stock outstanding as of July 6, 2020.

DAIS CORPORATION

TABLE OF CONTENTS

Explanatory Note

As previously disclosed in the Current Report on Form 8-K filed by Dais Corporation (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 15, 2020, the filing of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “Form 10-Q”) was delayed as a result of the disruptions caused by the novel coronavirus (“COVID-19”) pandemic, including the impact of (a) certain employees working from home, which slowed the Company’s routine quarterly close process, (b) delays in communications with various counterparties and (c) the need to perform additional analyses and procedures relating to the COVID-19 pandemic’s impact on the Company’s business and operations and on the financial statements included in the Form 10-Q. The Company has relied on the “Order Under Section 36 of the Securities Exchange Act Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies” dated March 25, 2020 (Release No. 34-88465), issued by the SEC in light of the COVID-19 pandemic, to delay the filing of the Form 10-Q.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DAIS CORPORATION

CONDENSED BALANCE SHEETS

See accompanying Notes to Unaudited Condensed Financial Statements

DAIS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying Notes to Unaudited Condensed Financial Statements

DAIS CORPORATION

CONDENSED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited) 

See accompanying Notes to Unaudited Condensed Financial Statements

DAIS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying Notes to Unaudited Condensed Financial Statements

Dais Corporation

Notes to Condensed Financial Statements

March 31, 2020 and 2019

(Unaudited)

Note 1. Background Information

Dais Corporation (“Dais”, “us,” “we,”, the “Company”), a New York corporation, is a nano-structured polymer technology materials company having developed and now commercializing products using its family of nanomaterial called Aqualyte. The first commercial product is called ConsERV, a fixed plate energy recovery ventilator which we believe is useful in meeting building indoor fresh air requirements while saving energy and lowering emissions for most forms of heating, ventilation and air conditioning (HVAC) equipment. The second commercial product is NanoClear, a water clean-up process useful in the creation of potable water from most forms of contaminated water including industrial process wastewater (petrochemical, steel, etc.) sea, brackish, or wastewater. We continue to develop other nano-structured polymer technology applications in HVAC/Refrigeration, energy, food services and wastewater treatment industries.The Company was incorporated in April 1993 and its corporate headquarters is in Odessa, Florida.

The Company is dependent on third parties to manufacture the key components needed for its nanostructured materials and some portion of the value-added products made with these materials. Accordingly, a suppliers’ failure to supply components in a timely manner, or to supply components that meet the Company’s quality, quantity and cost requirements or technical specifications, or the inability to obtain alternative sources of these components on a timely basis or on acceptable terms, would create delays in production of the Company’s products and/or increase its unit costs of production. Certain of the components or the processes of the Company’s suppliers are proprietary. If the Company was ever required to replace any of its suppliers, it should be able to obtain comparable components from alternative suppliers at comparable costs, but this would create a delay in production and may briefly affect the Company’s operations.

Basis of Presentation

The Company’s accompanying condensed financial statements are unaudited, but in the opinion of management reflect all adjustments necessary to fairly state the Company’s financial position, results of operations, stockholders’ deficit and cash flows as of and for the dates and periods presented. The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.

The unaudited financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted although the Company generally believes that the disclosures are adequate to ensure that the information presented is not misleading. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 2, 2020. The results of operations for the three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for any future quarters or for the entire year ending December 31, 2020.

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 three months ended March 31, 2020, the Company generated a net loss of $1,830,965 and has incurred significant losses since inception. As of March 31, 2020, the Company has an accumulated deficit of $56,017,295, total stockholders’ deficit of $11,499,959, negative working capital of $11,665,344 and cash and cash equivalents of $7,538. The Company used $92,311 and $181,425 of cash in operations during the three months ended March 31, 2020 and 2019, 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:

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. 

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 derivative liabilities, valuation allowance on deferred taxes and the warranty reserve.

Revenue recognition - The Company recognizes revenue in accordance with Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (ASC 606). The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company acts as a principal in its revenue transactions as the Company is the primary obligor in the transactions. Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable.

In certain instances, the Company’s ConsERV system product may carry a limited warranty of up to one year for all parts contained therein except for the energy recovery ventilator core produced and sold by the Company. The distributor of the ConsERV system may carry a limited warranty of up to ten years. The limited warranty includes replacement of defective parts for the ConsERV system and includes workmanship and material failure for the ConsERV core. The Company recorded an accrual of $91,531 for future warranty expenses at March 31, 2020 and December 31, 2019, which is included in accrued expenses, other.  

Royalty revenue is recognized as earned. The Company recognized royalty revenue of $0 for the three months ended March 31, 2020 and 2019, 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 $12,500 and $12,500 for the three months ended March 31, 2020 and 2019, respectively.

The Company accounts for revenue arrangements with multiple elements under the provisions of ASC Topic 605-25, “Revenue Recognition-Multiple-Element Arrangements.” In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has stand-alone value to the licensee. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.

In December 2017, the Company and Zhejiang MENRED Environmental Tech Co, Ltd., Zhejiang Province, China (“Menred”), entered into a License and Supply Agreement (the “Agreement”), effective December 21, 2017. Pursuant to the Agreement, the Company licensed certain intellectual property and improvements to Menred, for use in the manufacture and sale of energy recovery ventilators (“ERV”) and certain other HVAC systems for installation in commercial, residential or industrial buildings in China. Menred also agreed to purchase its requirements of certain products from the Company for Menred’s use, pursuant to the terms and conditions of the Agreement. Menred will also pay royalties, as defined, to the Company on a quarterly basis, based on price and production volume as provided by Menred. No royalties are due within the first year of the Agreement. Also pursuant to the Agreement, the Company is required to purchase 50,000 square meters of Product from Menred for delivery as an annual minimum with a 10,000 square meter minimum order quantity per delivery. The Agreement has a ten-year term with mutually agreed upon five-year extensions.

Shipping and handling fees billed to customers are included in revenue. Shipping and handling fees associated with freight are generally included in cost of revenue.

Cash and cash equivalents - For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company had no uninsured balances at March 31, 2020 and December 31, 2019. The Company has never experienced any losses related to these balances. The company does not have any cash equivalents.

Concentrations – At March 31, 2020, two customers accounted for 96% of accounts receivable. At December 31, 2019, one customer accounted for 77% of accounts receivable. For the three months ended March 31, 2020, four customers accounted for 90% of total revenue. For the three months ended March 31, 2019, three customers accounted for 88% of total revenue.

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 March 31, 2020 and December 31, 2019 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 March 31, 2020 and December 31, 2019, the Company had $42,520 and $85,456 of raw materials, $5,655 and $4,101 of in-process inventory and $1,977 and $1,724 of finished goods inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is recorded at March 31, 2020 and December 31, 2019, 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 expense was $6,383 and $9,866 for the three months ended March 31, 2020 and 2019, 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 2020 or 2019.

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 $4,338 and $6,504 for the three months ended March 31, 2020 and 2019, respectively. Based on current capitalized costs, total patent amortization expense is estimated to be approximately $16,000 per year for the next five years and thereafter.

Research and development expenses and funding proceeds - Expenditures for research and development are expensed as incurred. The Company incurred research and development costs of $78,805 and $74,687 for the three months ended March 31, 2020 and 2019, respectively. The Company accounts for proceeds received from government funding 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 $38,510 and $22,918 for the three months ended March 31, 2020 and 2019, respectively.

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.

Fair Value Measurements - The Company accounts for financial instruments in accordance with ASC 820 “Fair value Measurement and Disclosures”. 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:

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 March 31, 2020:

The reconciliation of the derivative liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows for the three months ended March 31, 2020 and 2019:

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 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. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and are excluded from the calculation. Common share equivalents of 19,669,898 and 260,352 were excluded from the computation of diluted earnings per share for the three months ended March 31, 2020 and 2019, respectively, because their effect is anti-dilutive.

Recent Accounting Pronouncements - There are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective as follows:

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this guidance. 

Other recent accounting pronouncements issued by the FASB and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Note 4. Accrued Expenses, Other

Accrued expenses, other consists of the following:

Note 5. 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 $12,198 and $12,198 for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and December 31, 2019 of $1,906,633 and $1,882,464, 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 N. 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 March 31, 2020, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount due was increased to $1,922,600 with an extended maturity date of January 30, 2020. As of the date of filing, the maturity date has been extended to July 15, 2020.

The Company is using the proceeds of the Note and related amendments for working capital purposes. Interest expense on the Note was $55,660 and $41,455 for the three months ended March 31, 2020 and 2019, respectively. Accrued interest on the Note was $499,986 and $444,326 at March 31, 2020 and December 31, 2019, respectively.

During May 2019 Dais Holdings Corp. (Dais Holdings”) was formed in Vancouver, B.C. and is wholly owned by our Chief Executive Officer. Dais Holdings’ purpose is to facilitate debt financing in Europe. The intent is for Dais Holdings to enter into the debt transactions. It will then immediately loan any proceeds received to the Company on the same or similar terms as the European debt. To date, Dais Holdings has not entered into any transactions and Dais Corporation has not received any funding from Dais Holdings. The Company has paid the professional and other fees for setting up the Dais Holdings structure, aggregating $150,000. Ultimately, Dais Corporation will benefit from the Dais Holdings capital raise activities, and therefore has borne the cost. The costs have been expensed as incurred.

On October 12, 2019, the Company entered into a promissory note with an entity controlled by our Chief Executive Officer in the amount of $10,000. The note bears interest at 10% per year and matures on October 12, 2021. Interest expense was $150 for the three months ended March 31, 2020. Accrued interest at March 31, 2020 and December 31, 2019 was $300 and $150, respectively.

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 6. Equity Transactions

Preferred Stock

At March 31, 2020 and December 31, 2019, 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 B Stock includes the right to vote in an amount equal to 51% of the votes to approve certain corporate actions, including, without limitation, changing the name of the Company and increasing the number of authorized shares.

Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Class A or Class B Preferred Stock unless, prior thereto, the holders of shares of Class A or Class B Preferred Stock shall have received $1.50 per share (the “Stated Amount”). The Class A and Class B Preferred Stock shall rank, with respect to the payment of liquidation, dividends and the distribution of assets, senior to the Company’s Common Stock.

The Holder (as defined in the Class A Preferred Stock certificate of designations) of the Class A Preferred Stock may convert all or part of the outstanding and unpaid Stated Amount (as defined in the Class A Preferred Stock certificate of designations) into fully paid and non-assessable shares of the Company’s common stock at the Conversion Price (as defined in the Class A Preferred Stock certificate of designations). The number of shares receivable upon conversion equals the Stated Amount divided by the Conversion Price. The Conversion Price shall be equal to the 75% of the average closing price for the 30 trading days prior to the election to convert. At no time will the Company convert any of the Stated Amount into common stock if that would result in the Holder beneficially owning more than 49% of the sum of the voting power of the Company’s outstanding shares of common stock plus the voting power of the Class A Preferred Stock. No shares of Class A Preferred Stock have been issued.

The shares of the Class B Preferred Stock shall be automatically redeemed by the Company at $0.01 per share on the date that Timothy N. Tangredi ceases, for any reason, to serve as an officer, director, or consultant of the Company. 

Common Stock

At March 31, 2020 and December 31, 2019, the Company’s Board of Directors has authorized 1,100,000,000 shares of common stock with a par value of $0.01 to be issued in series with terms and conditions to be determined by the Board of Directors.

2019 Transactions:

During the three months ended March 31, 2019, the Company issued 4,427 shares of common stock upon the conversion of $30,000 principal amount of notes and related accrued interest of $1,822.

Note 7. Convertible Notes Payable

The Company’s convertible promissory notes at March 31, 2020 and December 31, 2019 are as follows:

The company entered various convertible notes during 2019, aggregating $412,500 at March 31, 2020. The notes all mature during 2020.

The company entered various convertible notes during 2018, aggregating $1,041,460 at March 31, 2020. The notes all matured during 2019. Three notes that came due during the period were extended to August 15, 2019. Pursuant to the terms of the extensions, we have agreed to issue five hundred shares of common stock for each month that the notes are outstanding, commencing in April 2019. The shares have not been issued at March 31, 2020. We have accrued $858 as interest expense during the three months ended March 31, 2020 for the 4,500 shares due for the extensions. All notes are currently being renegotiated. Accrued interest related to the shares is $35,181 for an aggregate of 17,500 shares.

During the three months ended March 31, 2020, the Company amortized $81,526 of debt discount and $4,598 of debt issue costs to interest expense.

During the three months ended March 31, 2019, the Company amortized $169,700 of debt discount and $14,101 of debt issue costs to interest expense.

Debt conversions

During the three months ended March 31, 2019, the Company issued 4,427 shares of common stock with a value of $88,534 upon the conversion of $30,000 principal amount of notes and related accrued interest and costs of $1,822. Unamortized debt discount and debt costs of $10,250 and $512, respectively, were charged against gain on extinguishment of debt at the time of redemption. In addition, $75,547 of derivative liability was extinguished. The company recorded gain on extinguishment of debt of $8,073.

Note 8. 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.

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 $164,692 and $25,413 for the three months ended March 31, 2020 and 2019, respectively, and were charged to interest expense.

During the three months ended March 31, 2020 and 2019, the Company recorded expense of $1,326,753 and income of $24,262 related to the change in the fair value of the derivatives. The fair value of the embedded derivatives was $3,840,916 at March 31, 2020, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.11% - 0.12%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 463% - 540%; and (4) an expected life of 3 – 6 months. 

During the three months ended March 31, 2019, the Company issued 4,427 shares of common stock upon the conversion of $30,000 principal amount of notes and related accrued interest and costs of $1,822. As a result of the conversions, $75,547 of derivative liability was extinguished. The company recorded gain on extinguishment of debt of $8,073.

Note 9. Commitments and Contingencies

Litigation

From time to time, claims are made against the Company in the ordinary course of its business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties, or injunctions prohibiting the Company from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on the Company’s results of operations for that period or future periods.

In 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:

As a result of the above, we terminated the Soex Distribution Agreement. As provided in Section 14€ 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 lawsuit against an affiliate of Soex, Zhongshan Trans-Tech New Material Technology Co. Ltd. Zhongshan, China, (“Transtech”), and the Chairperson of the affiliate and Soex, based on new information learned by the Company. The Company will seek maximum relief and damages for this on-going and growing illegal misuse the Company’s Intellectual Property. The Company feels this third action will lead in a judgment in favor of the Company. 

Note 10. Subsequent Events                            

No material events have occurred after March 31, 2020 that requires recognition or disclosure in the financial statements except as follows:

On April 3, 2020, the Company entered into a Consent and Waiver and Twenty Third Amendment to the Senior Secured Promissory Note and Loan and Security Agreement with a related party (described in Note 5). 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, $1,922,600 or (ii) April 15, 2020. The Secured Party (related party) gives consent to the issuance of the 2020 Note and 2020 Security Agreement described below.

On April 3, 2020, the Company entered into a Loan and Security agreement (“2020 Security Agreement”) pursuant to which the Company issued a Promissory Note (“2020 Note”) for $54,000 for the purpose of purchase order funding. The note bears interest at 10% per annum compounded daily. The principal amount plus all interest is due on the earlier of (i) the date upon which the Company receives payment for the purchase order or (ii) June 25, 2020 (the “Maturity Date”)

On April 29, 2020, the Company entered into a Loan Agreement for the United States Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) in the amount of $144,750 bearing interest of 1%.The Company, given its use of the funds, fully expects that this sum will be considered ‘Forgiven’ under the terms of the PPP Loan Agreement.

On June 2, 2020, the Company entered into a Twenty Fourth Amendment of the Loan and Security Agreement with a related party (described in Note 5), 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, $1,957,600 or (ii) July 15, 2020 and the principal amount of the note was increased by $35,000.

On June 12, 2020, the Company entered into a United States Small Business Administration (“SBA”) Economic Injury Disaster Loan in the amount of $150,000 bearing interest of 3.75% per annum. Installment payments will be made monthly beginning June 12, 2021 and the balance will be payable by June 12, 2050.

Subsequent to the filing of the original SEC Form 10-K  the Company determined loss per common share, basic and diluted  and weighted average number of common  shares outstanding, basic and diluted  as of December 31, 2019 was incorrect due to a computational miscalculation. The Company intends to file Form 10-K/A to restate corrections to the financial statements for 2019, subsequent to the filing of this Form 10-Q. The corrections are as follows:

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may”, “will”, “expect”, “anticipate”, “believe”, “estimate” and “continue”, or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, and competition.

Unless otherwise indicated or the context requires otherwise, the words “we”, “us”, “our”, the “Company” or “our Company” refer to Dais Corporation, a New York corporation, and its subsidiaries.

Overview

Dais Corporation (“Dais”, “us,” “we,”, the “Company”) is a nanomaterial technology company developing and commercializing products using the nanomaterial called Aqualyte. The first commercial product is the Aqualyte nanomaterial itself. It is useful in managing moisture and key gases in a variety of cross-industry products. The second commercial product is called ConsERV, a fixed plate energy recovery ventilator which is useful in meeting building indoor fresh air requirements while saving energy and lowering emissions for most forms of heating, ventilation and air conditioning (HVAC) equipment. The third commercial product is NanoClear, a water clean-up process useful in the creation of potable water from most forms of contaminated water including industrial process wastewater (petrochemical, steel, etc.) sea, brackish, or wastewater. We continue to develop other Aqualyte uses in cross-industry applications, HVAC/Refrigeration, energy, and wastewater treatment.

Corporate History

We were incorporated as a New York corporation on April 8, 1993 as Dais Corporation. The Company was formed to develop new, cost-effective polymer materials for various applications, including providing a lower cost membrane material for Polymer Electrolyte Membrane fuel cells. We believe our research on materials science has yielded technological advances in the field of selective ion transport polymer materials.

In December 1999, the Company purchased the assets of Analytic Power Corporation, a corporation founded in 1984 to provide design, analysis, and systems integration services in the field of fuel cells, fuel processors, and integrated fuel cell power systems. Subsequently, on December 13, 1999, the Company changed its name to Dais Analytic Corporation.

In March 2002, the Company sold substantially all of its fuel cell assets to Chevron, a large U.S. oil company for a combination of cash and the assumption by such company of certain of the Company’s obligations. Subsequently, the Company focused on expanding its nano-structured polymer platform, having already identified the Energy Recovery Ventilator (“ERV”) application as our first commercial product.

In November of 2018 the board of directors unanimously voted to change the name of the Company from Dais Analytic Corporation to Dais Corporation (the “Name Change”). The Name Change took effect with FINRA on February 27, 2019.

On November 2, 2018, the shareholders of the Company approved an increase in the authorized common shares of the company from 240,000,000 shares to 340,000,000 shares. On March 14, 2019, the shareholders approved an increase in authorized common shares from 340,000,000 shares to 1,100,000,000 shares. In July 2019, the shareholders of the Company approved a reverse stock split of the issued and outstanding shares of the Company’s common stock at the ratio ranging from one-for-500 to one-for-2,000. On October 31, 2019, the Company amended its Certificate of Incorporation to reflect a one-for-2,000 reverse stock split of the Company’s common stock. The reverse split was effective December 6, 2019. All share and per share data have been retroactively restated in this quarterly report and the accompanying financial statements and footnotes to reflect the effects of the reverse split.

Our Technology

We use proprietary nanotechnology to reformulate thermoplastic materials called polymers. Nanotechnology involves studying and working with matter on an ultra-small scale. Polymers are chemical, plastic-like compounds used in diverse products such as Dacron, Teflon, and polyurethane. A thermoplastic is a material that is plastic or deformable, melts to a liquid when heated and to a brittle, glassy state when cooled sufficiently. These reformulated polymers have properties that allow them to be used in unique ways. We transform polymers from a hard, water impermeable substance into a material which water and similar liquids can, under certain conditions, permeate at a molecular level as opposed to flowing in bulk as liquid water through a pore. Water and similar molecules permeate readily through the thermoplastic material while oxygen and most chemicals show severely limited permeability. It is believed this selectivity depends on the size and chemical characteristics of the molecules. We call this specialized material Aqualyte.

Aqualyte^TM

Aqualyte membrane is the foundation of the Dais product line. It is made from commercially available polymer resin in flake form and industrial grade solvents which are mixed using a proprietary process involving heat, industrial equipment, and solvents. The resin and the solvents are commercially available from any number of chemical supply houses, or firms such as Dow. Our process changes the molecular properties of the starting polymer resins such that in their final form they selectively allow molecules through the plastic, including water molecules.

The Company invented and patented Aqualyte as a disruptive platform plastic material technology with carefully tailored properties for use in air, energy, and water applications. This modified block copolymer membrane with a nanoscale structure serves as the foundation of the Dais product line. It is a nonporous nanomaterial that selectively and efficiently transports moisture through a solid membrane and blocks passage of most gases and volatile compounds. The membrane is robust and durable with no pores to clog and no bacterial or fungal growth. We began selling Aqualyte in 2018 to strategic customers and continued through 2020 and beyond.

The Company continues to develop next generation versions of our Aqualyte material by adding new features and improving the manufacturability of the nanomaterial. These and other improvements allow Aqualyte to serve a wider variety of uses in the ConsERV and NanoClear target markets. Aqualyte is the underlying technology for our family of products, including ConsERV fixed-plate Energy Recovery Ventilators (ERVs), and NanoClear high-performance contaminated water cleaning devices. Aqualyte represents the basis for a broad class of materials with unique features precisely managed by engineered products. Features of the Aqualyte technology include the ability to create hermetic composite membranes possessing ion conduction, high moisture transfer and high molecular selectivity. Our engineering process manages these features to offer differentiated products like ConsERV and NanoClear that are targeting worldwide needs in the clean air, energy efficiency and clean water markets.

In July of 2017, Dais first entered into a multi-year, exclusive license agreement with the Haier Group to provide its Aqualyte nanomaterials for use in select refrigeration products. This first agreement continues to generate quarterly revenue for Dais. We project these revenues should increase as Haier continues its full rollout which is expected to complete during 2020. Dais projects this first agreement for targeted refrigeration products should ultimately generate over $5 million in annual revenues. Haier’s use of Dais’s Aqualyte material follows a growing world-wide trend reported by Market Insight Reports (July 18, 2018) that states global adoption of mature nanotechnology materials continues to grow and is on track to reach $90.5 billion by 2021 from $39.2 billion in 2016 at a compound annual growth rate (CAGR) of 18.2%, from 2016 to 2021. Dais was listed as one of the companies by Market Insight Reports along with BASF, Bayer AG, Dow Chemical, and others.

In addition, during 2019 and in the Quarter ending March 31, 2020, Dais sold Aqualyte to multiple customers for use in ventilation and waste water cleaning uses. These sales are expected to continue through 2020 and beyond.

ConsERV^TM

We continue widening sales channels for our ConsERV product, an HVAC energy conservation product which should save an average of 30% on HVAC ventilation air operating costs. These savings typically allow the remainder of the system to be smaller and less expensive, reducing carbon dioxide (CO₂) emissions from electrical power generation. ConsERV generally attaches onto existing HVAC systems, typically in commercial buildings, to provide improved ventilation air within the structure. ConsERV separates incoming fresh ventilation air from outgoing exhaust air with our Aqualyte nanotechnology polymer in an enthalpy heat exchanger referred to as a “core”. While Aqualyte physically isolates the air streams so they don’t mix, heat and moisture are freely exchanged through the material. For summer air conditioning, the core removes some of the heat and humidity from the incoming air and transfers it to the exhaust air stream, thereby saving energy under many conditions. For winter heating, the core typically recovers a portion of the heat and humidity in the exhaust air and transfers it into the incoming air to reduce hearing requirements.

ConsERV sales were negatively impacted at the beginning of 2017 from the December 2016 termination of a failed licensing agreement with a North American company. In 2018, the Company began selling its ConsERV cores and systems across North America. The Company is continuing this effort to expand its North American sales channels to grow ConsERV sales with initiatives aimed at targeted professionals and companies specializing in the sale of HVAC components and systems. In addition, the company began selling nanomaterial to companies in the European Union and continues discussions with several companies to expand the market for Aqualyte sales. In 2019 the company began discussions with interested parties outside of China in Southeast Asia to specify or distribute ConsERV nanomaterial, cores and systems. It is believed our continuing efforts in these areas will see revenues grow throughout 2020, and beyond.

In December 2017, we signed a 7-year exclusive agreement with the Zhejiang MENRED Environmental Tech Co., Ltd, Zhejiang Province , China, to provide our Aqualyte moisture transfer nanomaterial in a new line of Menred energy recovery ventilators (ERV) to be sold in the growing Chinese HVAC market, and for possible export use by Dais to meet its growing needs. This arrangement ]is projected to yield increasing revenues throughout 2020, and beyond.

When compared to similar competitive products, we believe, based on test results conducted by the Air-conditioning, Heating and Refrigeration Institute (AHRI), a leading industry association, ConsERV maintains an industry-leading position in the management of latent heat. The Company introduced an updated line of ConsERV products in January 2019 marketed as Vitality^TM, Purity^TM and Clarity^TM with further upgrades projected to be introduced in the second half of 2020. Sales from these products are expected to continue generating revenue during 2020 and beyond.

NanoClear^TM

We have commercially introduced the first NanoClear membrane evaporators for pilot testing, which remove quantities of metals, acids, salt and other impurities from various contaminated water sources, producing potable water using an environmentally friendly, low maintenance design that is competitive with industry leaders in terms of electrical consumption. We constructed and operate a pilot plant installed at a local county wastewater treatment facility that was commissioned in May 2013 and updated to the current generation of membrane evaporator in November 2016. This site has served as a showcase for potential commercial customers as well as a test bed for newer materials and hardware readying for commercialization. The accumulated test data, analyzed by an independent 3rd party firm, shows the quality of the water being produced has not diminished since system start-up. The evolving NanoClear product line purifies contaminated water, created largely during cooling of key manufacturing and utility processes. These sorts of applications are the Company’s primary focus. This includes higher salt concentrations and low pH waste streams.

Development efforts on a U.S. Army Corps of Engineers, $1,000,000, Phase II Small Business Innovation Research (SBIR) award continued throughout the first quarter of 2020 to develop NanoClear water cleaning technology for military use. The NanoClear funding project titled “Non-Fouling Water Reuse Technologies” uses our patented Aqualyte membrane to produce potable water from grey-water sources. The potential product improvements from this award will widen NanoClear’s applications in separating clean water from contaminated waste streams. Work on this project continues.

We received orders for delivery of our NanoClear industrial wastewater cleaning product for pilot evaluations in multiple industries throughout 2019. The product’s core strength, supported by Company, customer, and third party generated information, is its ability to clean contaminated wastewater created by a variety of manufacturing processes. We delivered our largest commercial project to date in the quarter ending in June 2019, with NanoClear evaporator modules for installation in multiple cogeneration power plant test sites in China. The experiences, and data from the pilots continue to accumulate. This valuable information is projected to be useful in finalizing NanoClear’s design to appeal to a far wider market.

PolyCool^TM

PolyCool is a product in development and is believed to offer strategic advantages over existing cooling tower systems. In effect, the process water is isolated in a largely closed system (similar to dry cooling technology) and initial testing shows it reduces the likelihood of dangerous germs and viruses such as Legionella becoming airborne. In-house testing has shown the ability to generate cooling effects comparable to today’s existing cooling towers while largely isolating the process water from the air stream.

PolyCool systems are expected to use up to 32% less energy than a conventional cooling tower while reducing or eliminating the need for expensive chemical biocide application programs to prevent the spread of risk of spreading dangerous diseases. We believe these savings can reduce the operating expenses of a cooling tower by up 74% versus conventional technology. The demonstrated ability of Aqualyte to resist fouling and operate with dissolved solids levels up to 25% salinity allows PolyCool technology to operate with seawater, brine, or other forms of wastewater instead of consuming potable water as with conventional evaporative cooling technologies. This advantage expands the applicability of evaporative cooling into geographic regions that are suffering from water scarcity or stress. In addition, the dramatic reduction in maintenance and safety issues allows use of PolyCool in smaller installations with correspondingly smaller maintenance budgets and less risk tolerance, which conventionally use less efficient dry cooling instead of evaporative cooling.

In the quarter ending September 30, 2018, the Company announced that we entered into a second definitive two-part, license agreement with the Haier Group of Qingdao, China for a new product for Haier’s HVAC cooling systems. Prototype testing continued in the first quarter of 2020; once complete, the product will move into field testing prior to deployment into Haier’s sales channels throughout Greater China. Once successful field testing is complete, the new product is anticipated to have a significant revenue impact for Dais, projected to be as much as $73 million annually. The product is an innovative PolyCool condensing unit designed for incorporation into commercial Haier cooling units to be deployed into Haier’s Greater China sales and distribution channels.

Product Summary

Dais’s advanced material has many demonstrated uses in the described products. Management is placing the majority of the Company’s resources behind the two most mature products in two major revenue generating paths: (1) ConsERV cores and systems, and (2) the sale of Aqualyte nanomaterials and engineering support in areas where Aqualyte has shown proven results and Dais has partners well-placed to bring products to market. Management projects this narrower focus will increase revenues allowing profitability to occur faster. This strategy leverages the Company’s experience and depth in marketing, building and selling ConsERV cores and systems and in manufacturing and selling high performance Aqualyte nanomaterial.

The advance materials-only sales activities are being done with select, successful companies located in the European Union and South East Asia (including China) which take full advantage of Dais’s past and continuing market penetration efforts. The uses include energy recovery ventilation and other known HVAC and select cross-industry uses.

To help us support our capabilities to deliver ConsERV cores and systems, and Aqualyte advanced nanomaterial, we have qualified manufacturing companies to join our supply chain to produce materials and components for us, guided by Dais-qualified manufacturing practices to meet the growing demand for product in N. America, in the European Union and South East Asia (including China). We project this expansion of the supply chain will result in lower costs and quicker order fulfillment, generating revenues faster.

Orders are already being generated from these agreements, and we expect them to increase as we expand and add new strategic partnerships along the way. The new orders include sales of Aqualyte nanomaterials, components for energy recovery ventilation, and other known HVAC and select cross industry products.

Results of Operations

Three Months Ended March 31, 2020 Compared to March 31, 2019

The following table sets forth, for the periods indicated, certain data derived from our Statements of Operations:

Revenue

We generate our revenues primarily from the sale of our ConsERV cores and systems, Aqualyte membrane, and NanoClear evaporators. Product sales were $274,958 and $369,840 for the three months ended March 31, 2020 and 2019, respectively, a decrease of $94,882 or 26%. The decrease in product sales resulted primarily from less Aqualyte nanomaterial being sold. We are focusing on creating sustainable revenues with Aqualyte and ConsERV core and system sales with the expectation that this will allow for continued growth in 2020 and beyond.

Revenues from royalty and license fees were $12,500 and $12,500 for the three months ended March 31, 2020 and 2019, respectively.

Cost of sales

Our cost of sales consists primarily of materials (including freight), direct labor, and outsourced manufacturing expenses incurred to produce our ConsERV cores and systems, NanoClear evaporators, and Aqualyte nanomaterial. Cost of goods sold were $141,474 and $173,858 for the three months ended March 31, 2020 and 2019 respectively, a decrease of $32,384 or 19%. This reflects the decrease in sales volume and reduced manufacturing costs.

We are dependent on third parties to manufacture the key components needed for our nano-structured based materials and some portion of the value-added products made with these materials. Accordingly, a supplier’s failure to supply components in a timely manner, or to supply components that meet our 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 our products and/or increase the unit costs of production. Certain of the components or the processes of our suppliers are proprietary. If we were ever required to replace any of our suppliers, we should be able to obtain comparable components from alternative suppliers at comparable costs, but this would create a delay in production.

Gross margin

Gross margin from the sales of products was $145,984 and $208,482 representing 51% and 55% for the three months ended March 31, 2020 and 2019. The gross margin decrease was due to normal variances in manufacturing costs between our product lines.

Research and development costs

Expenditures for research and development are expensed as incurred. We incurred research and development costs of $78,805 and $74,687 for the three months ended March 31, 2020 and 2019, an increase of $4,118 or 6%. We account for proceeds received from government funding for research and development as a reduction in research and development costs. We recorded proceeds against research and development expenses on the Statements of Operations of $38,510 and $22,918 for the three months ended March 31, 2020 and 2019, an increase of $15,592 or 68%. Variances in grant expenditures and reimbursements are due to an emphasis on completing an existing Small Business Innovation Research (SBIR) Phase II grant.

Selling, general and administrative expenses

Our selling, general and administrative expenses consist primarily of payroll and related benefits, share-based compensation, professional fees, marketing and channel support costs, and other infrastructure costs such as insurance, information technology and occupancy expenses. Selling, general and administrative expenses were $255,905 and $434,835 for the three months ended March 31, 2020 and 2019, a decrease of $178,930 or 41%

Our selling, general and administrative expenses may fluctuate due to a variety of factors, including, but not limited to:

The decrease in selling, general and administrative expenses for the three months ended March 31, 2020 compared to the same period in 2019 is primarily the result of decreased legal and professional fees.

Other Income (Expense)

Other expenses were $1,680,749 and $440,040 for the three months ended March 31, 2020 and 2019, respectively, an increase of $1,240,709 or 282%. The increase in other expense is primarily due to an increase in expense related to the change in fair value of derivative liabilities (primarily as a result of changes in our stock price), partially offset by a decrease in debt discount and finance cost.

Net Loss

Net loss for the three months ended March 31, 2020 was $1,830,965 compared to a net loss of $718,162 for the three months ended March 31, 2019. The increased loss in the three months ended March 31, 2020 was primarily due to the increase in other expenses, partially offset by a decrease in operating loss.

Liquidity and Capital Resources

The accompanying financial statements have been prepared assuming that we will continue as a going concern. For the three months ended March 31, 2020, we generated a net loss of $1,830,965 and have incurred significant losses since inception. As of March 31, 2020, we had an accumulated deficit of $56,017,295, a stockholders’ deficit of $11,499,959 and cash and cash equivalents of $7,538. We used $92,311 and $181,425 of cash in operations during the three months ended March 31, 2020 and 2019, respectively, which was funded primarily by proceeds from note payables. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. We are currently pursuing the following sources of short and long-term working capital:

Management believes:

Any failure by us 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 our financial condition, results of operations and cash flows as could any unfavorable terms. There are no assurances we will be able to obtain the financing and planned product development commercialization. Accordingly, we may not have the ability to continue as a going concern. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

The Company entered into a Loan and Security Agreement in June 2016 pursuant to which the Company issued a Senior Secured Promissory Note that grants the Holder a secured interest in the assets of the Company.

Statement of Cash Flows

Cash and cash equivalents as of March 31, 2020 were $7,538 compared to $4,083 as of December 31, 2019. Cash is primarily used to fund our working capital requirements.

Net cash used in operating activities was $92,311 for the three months ended March 31, 2020 compared to $181,425 for the same period in 2019. The decrease in net cash used was primarily due to lower operating loss, change in customer deposit and an increase in amortization of debt discount.

Net cash used in investing activities was $4,234 for the three months ended March 31, 2020 compared to $2,596 for the same period in 2019, driven by an increase in patent costs.

Net cash provided by financing activities was $100,000 for the three months ended March 31, 2020 compared to $211,500 for the same period in 2019, resulting from less loans taken driven by a decrease in operating expenses.

Financing and Capital Transactions

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 N. 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.

During 2016 through the period ended March 31, 2020, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount due was increased to $1,922,600 with an extended maturity date of January 30, 2020. 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 239,125 shares of common stock with an exercise price of $0.01 with a ten-year exercise period and 240 shares of common stock.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies”.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and outside legal and accounting resources of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not effective in alerting them in a timely manner to material information required to be disclosed in our periodic reports filed with the SEC as a result of limited resources, and a lack of segregation of duties.

During our most recent quarter, there has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any pending legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations. The information required by this Item is incorporated herein by reference to Notes to Financial Statements––Note 10. Litigation in Part I, Item 1, of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

Not required under Regulation S-K for “smaller reporting companies”.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of the Company’s equity securities during the quarter ended March 31, 2020 that were not previously reported in a Current Report on Form 8-K.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

___________ 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.