10-Q 1 dlyt_10q.htm FORM 10-Q dlyt_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2022

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

 

Commission File No. 000-53554

 

DAIS CORPORATION

(Exact name of Registrant as specified in its charter)

 

New York

 

14-1760865

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

11552 Prosperous Drive, Odessa, Florida

 

33556

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

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 ☒ 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 ☒ 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.

 

Large, accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

Emerging Growth Company

 

 

 

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 ☒

 

There were 10,126,228 shares of the Registrant’s $0.01 par value common stock outstanding as of August 18, 2022.

 

 

 

 

DAIS CORPORATION

 

TABLE OF CONTENTS

 

 

 

 

Page No.

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

Condensed Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021

 

3

 

 

Condensed Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)

 

4

 

 

Condensed Statement of Stockholders’ Deficit for the three and six months ended June 30, 2022 and 2021 (unaudited)

 

5

 

 

Condensed Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)

 

6

 

 

Notes to Condensed Financial Statements (unaudited)

 

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

 

30

 

Item 1A.

Risk Factors

 

30

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

Item 3.

Defaults Upon Senior Securities

 

30

 

Item 4.

Mine Safety Disclosures

 

30

 

Item 5.

Other Information

 

30

 

Item 6.

Exhibits

 

31

 

 

 

 

 

 

SIGNATURES

 

32

 

 

 
2

Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

DAIS CORPORATION

CONDENSED BALANCE SHEETS

 

 

 

June 30,

2022

 

 

December 31,

2021

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash

 

$44,150

 

 

$773,423

 

Accounts receivable, net

 

 

52,295

 

 

 

51,917

 

Inventory

 

 

212,155

 

 

 

72,067

 

Prepaid expenses

 

 

89,666

 

 

 

32,637

 

Total Current Assets

 

 

398,266

 

 

 

930,044

 

Property and equipment, net

 

 

35,621

 

 

 

13,353

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Deposits

 

 

4,780

 

 

 

4,780

 

Patents, net

 

 

154,135

 

 

 

152,924

 

Total Other Assets

 

 

158,915

 

 

 

157,704

 

TOTAL ASSETS

 

$592,802

 

 

$1,101,101

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable, including related party payables of $263,292 and $282,729 at June 30, 2022 and December 31, 2021, respectively

 

$951,003

 

 

$922,305

 

Accrued expenses, other, including interest due to related party of $2,369,086 and $2,153,723 at June 30, 2022 and December 31, 2021, respectively

 

 

3,248,184

 

 

 

2,945,918

 

Accrued compensation and related benefits

 

 

2,221,779

 

 

 

2,208,692

 

Customer deposits

 

 

360,454

 

 

 

35,306

 

Advance payment received for convertible note

 

 

15,000

 

 

 

15,000

 

Advance payment received for purchase of common stock

 

 

30,000

 

 

 

30,000

 

Notes payable to related parties

 

 

2,174,897

 

 

 

2,174,897

 

Current portion of deferred revenue

 

 

273,656

 

 

 

298,656

 

Note payable – due within one year

 

 

376,000

 

 

 

376,000

 

Convertible notes payable, net of unamortized discount and debt costs of $788,557 and $1,437,838, respectively

 

 

1,098,443

 

 

 

194,162

 

Total Current Liabilities

 

 

10,749,416

 

 

 

9,200,936

 

Notes payable – due after one year

 

 

272,340

 

 

 

272,340

 

Total Liabilities

 

 

11,021,756

 

 

 

9,473,276

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Preferred stock, undesignated; $0.01 par value; 7,990,000 shares authorized; no shares issued and outstanding

 

 

-

 

 

 

-

 

Preferred stock, Series A; $0.01 par value; 2,000,000 shares authorized; no shares issued and outstanding

 

 

-

 

 

 

-

 

Preferred stock, Series B; $0.01 par value; 10,000 shares authorized; 10 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

 

 

-

 

 

 

-

 

Common stock; $0.01 par value; 1,100,000,000 shares authorized; 9,269,562 and 9,415,425 shares issued and 9,268,933 and 9,414,796 shares outstanding at June 30, 2022 and December 31, 2021, respectively

 

 

92,695

 

 

 

94,154

 

Common stock to be issued, 1,000,000 and no shares, respectively

 

 

10,000

 

 

 

-

 

Capital in excess of par value

 

 

51,056,094

 

 

 

50,818,885

 

Accumulated deficit

 

 

(60,125,631 )

 

 

(57,823,102 )

 

 

 

(8,966,842 )

 

 

(6,910,063 )

Treasury stock at cost, 629 shares at June 30, 2022 and December 31, 2021, respectively

 

 

(1,462,112 )

 

 

(1,462,112 )

Total Stockholders’ Deficit

 

 

(10,428,954 )

 

 

(8,372,175 )

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$592,802

 

 

$1,101,101

 

 

See accompanying Notes to Unaudited Condensed Financial Statements

 

 
3

Table of Contents

 

DAIS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$117,699

 

 

$109,181

 

 

$160,894

 

 

$171,990

 

Royalty and license fees

 

 

12,500

 

 

 

12,500

 

 

 

25,000

 

 

 

25,000

 

 

 

 

130,199

 

 

 

121,681

 

 

 

185,894

 

 

 

196,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

177,205

 

 

 

45,030

 

 

 

229,645

 

 

 

82,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

 

(47,006 )

 

 

76,651

 

 

 

(43,751 )

 

 

114,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net of government grant proceeds of $0, $29,886, $0 and $60,966, respectively

 

 

61,748

 

 

 

26,329

 

 

 

126,621

 

 

 

39,846

 

Selling, general and administrative

 

 

403,349

 

 

 

1,023,687

 

 

 

828,625

 

 

 

1,285,074

 

TOTAL OPERATING EXPENSES

 

 

465,097

 

 

 

1,050,016

 

 

 

955,246

 

 

 

1,324,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(512,103 )

 

 

(973,365 )

 

 

(998,997 )

 

 

(1,210,820 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(707,896 )

 

 

(159,956 )

 

 

(1,303,532 )

 

 

(360,808 )

Change in fair value of derivative liabilities

 

 

-

 

 

 

60,311

 

 

 

-

 

 

 

2,241,678

 

Gain on extinguishment of debt

 

 

-

 

 

 

1,148,554

 

 

 

-

 

 

 

1,148,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER INCOME (EXPENSE), NET

 

 

(707,896 )

 

 

1,048,909

 

 

 

(1,303,532 )

 

 

3,029,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$(1,219,999 )

 

$75,544

 

 

$(2,302,529 )

 

$1,818,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER COMMON SHARE, BASIC

 

$(0.13 )

 

$0.02

 

 

$(0.24 )

 

$1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE, DILUTED

 

$(0.13 )

 

$(0.13 )

 

$(0.24 )

 

$(0.17 )

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC

 

 

9,717,827

 

 

 

3,691,248

 

 

 

9,567,149

 

 

 

1,994,429

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, DILUTED

 

 

9,717,827

 

 

 

16,964,471

 

 

 

9,567,149

 

 

 

278,128

 

 

See accompanying Notes to Unaudited Condensed Financial Statements

 

 
4

Table of Contents

 

DAIS CORPORATION

CONDENSED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Common

Stock to

 

 

Capital in Excess of Par

 

 

Accumulated

 

 

Treasury

 

 

Total Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

be issued

 

 

Value

 

 

Deficit

 

 

Stock

 

 

Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

 

10

 

 

$-

 

 

 

9,415,425

 

 

$94,154

 

 

$

 

 

$50,818,885

 

 

$(57,823,102 )

 

$(1,462,112 )

 

$(8,372,175 )

Net loss for the three months ended March 31, 2022

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

(1,082,530 )

 

 

-

 

 

 

(1,082,530 )

Balance at March 31, 2022

 

 

10

 

 

 

-

 

 

 

9,415,425

 

 

 

94,154

 

 

 

 

 

 

 

50,818,885

 

 

 

(58,905,632 )

 

 

(1,462,112 )

 

 

(9,454,705 )

Shares issued for conversion of debt and finance cost

 

 

-

 

 

 

-

 

 

 

457,500

 

 

4,575

 

 

 

 

 

 

 

41,175

 

 

-

 

 

 

-

 

 

 

 45,750

 

Cashless exercise of warrants

 

 

-

 

 

 

-

 

 

 

396,637

 

 

 

3,966

 

 

 

 

 

 

 

(3,966

 

 

-

 

 

 

-

 

 

 

-

 

Shares Cancelled – to be reissued

 

 

 

 

 

 

 

 

 

 

(1,000,000

 

 

 

(10,000 )

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200,000

 

 

 

 

 

 

 

 

 

 

 

200,000

 

Net loss for the three months ended June 30, 2022

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

(1,219,999 )

 

 

-

 

 

 

(1,219,999 )

Balance at June 30, 2022

 

 

10

 

 

$-

 

 

 

9,269,562

 

 

$92,695

 

 

$10,000

 

 

$51,034,374

 

 

$(60,125,631 )

 

$

(1,462,112 )

 

$(10,428,954 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

10

 

 

$-

 

 

 

278,757

 

 

$2,788

 

 

 

 

 

 

$45,976,660

 

 

$(56,974,063 )

 

$(1,462,112 )

 

$(12,456,727 )

Net income for the three months ended March 31, 2021

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

1,743,060

 

 

 

-

 

 

 

1,743,060

 

Balance at March 31, 2021

 

 

10

 

 

 

-

 

 

 

278,757

 

 

 

2,788

 

 

 

 

 

 

 

45,976,660

 

 

 

(55,231,003 )

 

 

(1,462,112 )

 

 

(10,713,667 )

Shares and warrants issued for services

 

 

 

 

 

 

 

 

 

 

2,100,000

 

 

 

21,000

 

 

 

 

 

 

 

730,457

 

 

 

 

 

 

 

 

 

 

 

751,457

 

Shares and warrants issued for settlement of debt

 

 

 

 

 

 

 

 

 

 

7,036,668

 

 

 

70,366

 

 

 

 

 

 

 

2,616,768

 

 

 

 

 

 

 

 

 

 

 

2,687,134

 

Net income for the three months ended June 30, 2021

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

75,544

 

 

 

-

 

 

 

75,544

 

Balance at June 30, 2021

 

 

10

 

 

$-

 

 

 

9,415,425

 

 

$94,154

 

 

 

 

 

 

$49,323,885

 

 

$(55,155,459 )

 

$

(1,462,112 )

 

$(7,199,532 )

 

See accompanying Notes to Unaudited Condensed Financial Statements

 

 
5

Table of Contents

 

DAIS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$(2,302,529 )

 

$1,818,604

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,949

 

 

 

10,605

 

Stock based compensation

 

 

-

 

 

 

751,457

 

Change in fair value of derivative liability

 

 

-

 

 

 

(2,241,678 )

Gain on extinguishment of debt

 

 

-

 

 

 

(1,148,554 )

Non-cash interest expenses

 

 

750

 

 

 

124,290

 

Amortization of debt discount and debt costs

 

 

849,282

 

 

 

-

 

(Increase) decrease in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(378 )

 

 

(16,482 )

Inventory

 

 

(140,088 )

 

 

(610 )

Other receivables

 

 

-

 

 

 

(16,664 )

Prepaid expenses/Other assets

 

 

(57,029 )

 

 

(31,000 )

Increase (decrease) in:

 

 

 

 

 

 

 

 

Accounts payable

 

 

28,698

 

 

 

8,033

 

Accrued expenses

 

 

315,352

 

 

 

323,006

 

Customer deposits

 

 

325,148

 

 

 

50,036

 

Deferred revenue

 

 

(25,000 )

 

 

(25,000 )

Net cash used in operating activities

 

 

(991,845 )

 

 

(393,957 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Increase in property and equipment

 

 

(26,435 )

 

 

-

 

Increase in patent costs

 

 

(10,993 )

 

 

(12,064 )

Net cash used in investing activities

 

 

(37,428 )

 

 

(12,064 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from notes payable - related parties

 

 

-

 

 

 

49,297

 

Proceeds from note payable

 

 

300,000

 

 

 

435,340

 

Repayment of note payable

 

 

-

 

 

 

(26,200 )

Net cash provided by financing activities

 

 

300,000

 

 

 

458,437

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(729,273 )

 

 

52,416

 

Cash, beginning of period

 

 

773,423

 

 

 

36,516

 

Cash, end of period

 

$44,150

 

 

$88,932

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$154,398

 

 

$-

 

 

 

 

 

 

 

 

 

 

NON-CASH FINANCING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Issuance of common stock and warrants upon settlement of notes and accrued interest

 

$-

 

 

$2,687,134

 

Issuance of common stock upon conversion of notes

 

$45,750

 

 

 

-

 

Notes and accrued interest settled with common stock and warrants

 

$-

 

 

$2,107,414

 

Beneficial conversion feature of convertible debt

 

$200,000

 

 

 

-

 

Derivative liability extinguished

 

$-

 

 

$1,728,274

 

 

See accompanying Notes to Unaudited Condensed Financial Statements

 

 
6

Table of Contents

 

Dais Corporation

Notes to Condensed Financial Statements

June 30, 2022 and 2021

(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. Aqualyte itself is the first product being commercialized. The second 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 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, 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2022. The results of operations for the three and six month periods ended June 30, 2022 are not necessarily indicative of the results that may be expected for any future quarters or for the entire year ending December 31, 2022.

 

 
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Note 2. Going Concern and Management’s Plans

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred significant losses since inception, incurred a loss of $2,302,529 for the six months ended June 30, 2022 and, as of June 30, 2022, the Company has an accumulated deficit of $60,125,631, total stockholders’ deficit of $10,428,954, negative working capital of $10,351,150 and cash of $44,150. The Company used $991,845 and $393,957 of cash in operations during the six months ended June 30, 2022 and 2021, respectively, which was funded primarily by proceeds from loans from related parties and others. There is no assurance that any such financing will be available in the future. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently pursuing the following sources of short and long-term working capital:

 

The Company has selected targeted parties that it is actively working with who are interested in licensing, purchasing the rights to, or establishing a joint venture to commercialize applications of the Company’s technology; 

 

The Company continues to seek capital from certain strategic and/or government grant opportunities and related sources. These sources may, pursuant to any agreements that may be developed in conjunction with such funding, assist in the product definition and design, roll-out and channel penetration of products; and 

 

The Company is actively working with newer investors, private equity companies, purchase order financing parties, and seemingly increased its value and potential to attract new investors in the eyes of the Management team when the Company completed the exchange program of ‘debt to equity’ in the 2nd quarter of 2021 clearing out all convertible debt in exchange for equity at a fixed price at the end of the second quarter of 2021. 

 

Failure by us to timely procure additional financing or investment adequate to fund the ongoing operations, including planned product development initiatives and commercialization efforts, or experience a major supply chain disruption will have material adverse consequences on our financial condition, results of operations and cash flows as could any unfavorable terms. While we believe the Company’s prospects have improved for funding, there are no assurances we will be able to obtain the financing and planned product development commercialization. The Company may fail to reach an accord with the Senior Secured Note Holder who has deep rights with the assets of the Company pledged as security for repayment of the Note. Accordingly, we may not have the ability to continue as a going concern. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

 

Note 3. Significant Accounting Policies

 

The significant accounting policies followed are:

 

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates underlying the Company’s reported financial position and results of operations include the allowance for doubtful accounts, fair value of stock-based compensation, fair value of derivative liabilities, valuation allowance on deferred taxes and the warranty reserve.

 

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

 

 
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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 June 30, 2022, and December 31, 2021, 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 June 30, 2022 and 2021, 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 June 30, 2022 and 2021, respectively and $25,000 and $25,000 for the six months ended June 30, 2022 and 2021, respectively.

 

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

 

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

 

Cash and cash equivalents - For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally insured limits. The Company had uninsured balances of approximately $0 and $483,000 at June 30, 2022 and December 31, 2021, respectively. The Company has never experienced any losses related to these balances. The company does not have any cash equivalents at June 30, 2022 and December 31, 2021.

 

Concentrations At June 30, 2022, two customers accounted for 100% of accounts receivable. At December 31, 2021, two customers accounted for 100% of accounts receivable. For the six months ended June 30, 2022, four customers accounted for 90% of total revenue. For the six months ended June 30, 2021, three customers accounted for 74% 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 June 30, 2022 and December 31, 2021 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 June 30, 2022 and December 31, 2021, the Company had $82,040 and $59,631 of raw materials, $106,541 and $1,844 of in-process inventory and $23,574 and $10,592 of finished goods inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is recorded at June 30, 2022 and December 31, 2021, 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 $2,317 and $367 for the three months ended June 30, 2022 and 2021, respectively, and $4,167 and $1,355 for the six months ended June 30, 2022 and 2021, 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 2022 or 2021.

 

 
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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 $4,951 and $4,688 for the three months ended June 30, 2022 and 2021, respectively and $9,782 and $9,250 for the six months ended June 30, 2022 and 2021, respectively. Based on current capitalized costs, total patent amortization expense is estimated to be approximately $19,400 per year for the next five years and thereafter.

 

Research and development expenses and funding proceeds - Expenditures for research and development are expensed as incurred. The Company incurred research and development costs of $61,748 and $56,215 for the three months ended June 30, 2022 and 2021, respectively and $126,621 and $100,812 for the six months ended June 30, 2022 and 2021, 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 $0 and $29,886 for the three months ended June 30, 2022 and 2021, respectively and $0 and $60,966 for the six months ended June 30, 2022 and 2021, respectively.

 

Derivative Liability - The Company, up until June 30, 2021, had financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change.

 

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:

 

 

·

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

·

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

·

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

 

The reconciliation of the derivative liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows for the six months ended June 30, 2021:

 

 

 

June 30,

 

 

 

2021

 

Balance, beginning of period

 

$3,845,662

 

Additions

 

 

124,290

 

Extinguished derivative liability

 

 

(1,728,274 )

Change in fair value of derivative liabilities

 

 

(2,241,678 )

Balance, end of period

 

$-

 

 

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 32,576,731 were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2022 because their effect is anti-dilutive.

 

 
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Reconciliation of diluted loss per share for the three and six month periods ended June 30, 2021 is as follows:

 

 

 

Three Months

Ended

June 30,

2021

 

 

Six Months

Ended

June 30,

2021

 

Net income attributable to common shareholders

 

$75,544

 

 

$1,818,604

 

Income attributable to note derivatives

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

 

(60,311 )

 

 

(2,241,678 )

Gain on extinguishment of debt

 

 

(1,148,554 )

 

 

(1,148,554 )

Expense attributable to note derivatives

 

 

 

 

 

 

 

 

Interest expense

 

 

88,756

 

 

 

216,378

 

Diluted loss attributable to common shareholders

 

$(1,044,565 )

 

$(1,355,250 )

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

 

3,691,248

 

 

 

1,994,429

 

Derivative notes and interest shares

 

 

4,639,561

 

 

 

5,831,493

 

Diluted shares outstanding

 

 

8,330,809

 

 

 

7,825,922

 

 

 

 

 

 

 

 

 

 

Diluted loss per share

 

$(0.13 )

 

$(0.17 )

 

The Company had no derivative liabilities so measured for the three and six months ended June 30, 2022 and accordingly no diluted loss per share over those periods.

 

Recent Accounting Pronouncements - 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:

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accrued expenses, other

 

$659,970

 

 

$656,810

 

Accrued interest

 

 

2,496,683

 

 

 

2,197,577

 

Accrued warranty costs

 

 

91,531

 

 

 

91,531

 

 

 

$3,248,184

 

 

$2,945,918

 

 

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 related to this lease of $12,198 and $12,198 for the three months ended June 30, 2022 and 2021, respectively and $24,396 and $24,396 for the six months ended June 30, 2022 and 2021, respectively. The lease term will terminate upon 30 days’ written notice from landlord or 90 days written termination from us. The lease is considered to be short term or month to month.

 

The Company has accrued compensation due to the Chief Executive Officer as of June 30, 2022 and December 31, 2021 of $2,089,467 and $2,071,380, respectively, included in accrued compensation and related benefits in the accompanying balance sheets.

 

On June 24, 2016, the Company entered into a Loan and Security Agreement (“Security Agreement”) with the entity known as PKT Strategic Assets, LLC (the “Holder”) pursuant to which the Company issued a Senior Secured Promissory Note for $150,000 (the “Note”). The Note has an interest rate is 12% per annum compounded daily with a minimum interest payment of $2,000. The Note grants the Holder a secured interest in all the assets of the Company. During 2016 to the period ended June 30, 2022, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount and interest totaled $4,532,333 (including fees and other expenses). The Holder’s corporation is controlled by Ms. Tangredi, related to Tim Tangredi: the Company’s CEO and stockholder, and therefore, is a Related Party of the Company. The Company is to pay the Holder the principal, plus all interest and fees due in accordance with terms and conditions of the Security Agreement on the earlier of: (i) the date upon which the Company secures funds, regardless of source, equal to or exceeding, in the aggregate, $1,000,000 or (ii.) November 1, 2021 which has expired. The Holder has not declared the Note in Default as the Parties have reached a tentative agreement to several issues including the extension of the Maturity Date (the “Maturity Date”). The Parties are working to complete this agreement during the third quarter of 2022. The Company has recorded interest expense of $220,395 and $66,370 for the three-month periods ended June 30, 2022 and 2021, respectively and $369,461 and $130,353 for the six-month periods ended June 30, 2022 and 2021, respectively.  We made a payment of fees and accrued interest totaling $154,398 during the six months ended June 30, 2022. Accrued interest was $2,367,436 and $2,152,373 at June 30, 2022 and December 31, 2021, respectively.

 

 
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On October 12, 2019, the Company entered 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 matured on October 12, 2021. Interest expense on the note was $150 for each of the three month periods ended June 30, 2022 and 2021, respectively, and was $300 for each of the three month periods ended June 30, 2022 and 2021, respectively. Accrued interest was $1,650 and $1,350 at June 30, 2022 and December 31, 2021, respectively. The Holder has not declared the Note in Default or extended the Maturity Date.

 

On April 29, 2022, the Company received a loan of $100,000 from its Chief Executive Officer. This was repaid in full on May 17, 2022.

 

On February 27, 2015, the Company, and Tim N. Tangredi, the Company’s Chief Executive Officer entered an amendment (the “Tangredi Employment Agreement Amendment”) to Mr. Tangredi’s Amended and Restated Employment Agreement. Currently, the Company has non-interest-bearing accrued compensation due to the Chief Executive Officer for deferred salaries earned and unpaid as described above. The Tangredi Employment Agreement Amendment provides that, if at any time during a calendar year, the unpaid compensation is greater than $500,000, Mr. Tangredi must convert $100,000 of unpaid compensation into the Company’s common stock during such calendar year. The conversion rate shall be equal to 75% of the average closing price for the Company’s common stock for the 30 trading days prior to the date of conversion. The Company shall also pay to Mr. Tangredi a cash payment equal to 20% of the compensation income incurred because of the conversion. The Company has waived the conversion requirement from 2015 to the present. See Note 13 Commitments and Contingencies for further disclosure of the terms of Mr. Tangredi’s employment agreement.

 

Further, at any time any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under such Act) of greater of 40% of the then-outstanding voting power of the voting equity interests of the Company or a person or group initiate a tender offer for the Company’s common stock, Mr. Tangredi may convert unpaid compensation into Class A Convertible Preferred Stock (“Class A Preferred Stock”) of the Company at a conversion price of $1.50 per share. The Board of Directors waived the requirement to convert $100,000 of unpaid compensation into common stock during 2016. No amounts have been converted under the terms of the Tangredi Employment Agreement Amendment to date.

 

The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.

 

Note 6. Equity Transactions

 

Preferred Stock

 

At June 30, 2022 and December 31, 2021, 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 had 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 had 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

 

During January and February 2022, after the Company’s fiscal year ended December 31, 2021, the Company’s Board of Directors, with input from the Company’s financial advisors, completed its reevaluation of the Company’s capital structure, including the advisability of authorizing addition series of preferred stock, par value $0.01 (“Preferred Stock”). The Board of Directors determined that it was in the best interests of the Company and its stockholders to authorize four new series of Preferred Stock (sometimes referred to as “New Series of Preferred Stock”).

 

As a result, the Board of Directors and management with the assistance of its outside financial advisors prepared a Certificate of Amendment to its Certificate of Incorporation for the purpose authorizing the four New Series of Preferred Stock, which was subject to the filing by the Company of a Certificate of Amendment with the Department of State of the State of New York (“Certificate of Amendment”).

 

 
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To implement the authorization of the four New Series of Preferred Stock, the Certificate of Amendment was submitted to the Department of State on March 17, 2022 and was accepted for filing on March 22, 2022. The recently authorized New Series of Preferred Stock included: (i) Series C Convertible Preferred Stock, consisting of 100,000 shares, all of which were to be issued following acceptance of the Certificate of Amendment by the Department of State, to two (2) third-party accredited investors who had provided bona fide financial consulting services to the Company; (ii) Series D Convertible Preferred Stock, consisting of 10,000 shares, which shares may be issued, at the sole discretion of the Board of Directors, from time to time, to consultants and other third parties for, among other purposes, new services to the Company and for other good and valuable consideration, none of which shares have been issued; (iii) Series E Convertible Preferred Stock, consisting of 250,000 shares, all of which were to be issued following final acceptance of the Certificate of Amendment by the Department of State, being issued to three (3) “accredited investors” including the Company’s financial advisors in consideration for their capital contributions to the Company; and (iv) Series F Convertible Preferred Stock consisting of 1,500,000 shares, 1,000,000 shares of which are intended to be issued to several long-tenured key employees and the Company’s Board of Directors in consideration for previously rendered services to the Company as well as to certain noteholders and others under agreements and arrangements that have been authorized by the Board of Directors. Equity issuances within these various classes will take place during the third quarter of 2022.

 

Common Stock

 

As of June 30, 2022 and December 31, 2021, the Company has 1,100,000,000 authorized 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.

 

2022 Common Stock Transactions

 

During May 2022, the Company issued 457,500 shares of common stock upon the conversion of $45,000 of notes payable, plus $750 of costs.

 

The company issued 396,637 shares of common stock upon the cashless exercise of 500,000 common stock warrants.

 

The Company cancelled 1,000,000 shares of common stock, which are to be reissued in the future.

 

2021 Common Stock Transactions

 

During the six months ended June 30, 2021, the Company issued 7,036,668 shares of common stock and 3,576,733 common stock purchase warrants in settlement of convertible notes payable and related accrued interest. The shares were valued at $1,829,534 and the warrants were valued at $857,600

 

During the six months ended June 30, 2021, the Company issued 2,100,000 shares of common stock, valued at $567,000, for services.

 

Note 7. Convertible Notes Payable and Exchange Program

 

Debt to Equity Exchange Program

 

In the period from June 2017 through the end of December 2019, the Company entered eight Convertible Note Holder agreements with eight Note Holders totaling, with all fees, interest, and principal, $2,008,812 as of December 31, 2020. The notes were not considered to be in default and were being renegotiated at March 31, 2021. Subsequently, as of May 31, 2021, each Convertible Noteholder received their fees, interest, and principal totaling $2,107,414 in shares of Common stock of the Company (at $0.030 per share) with 50% warrant coverage (1 year cash warrant with a strike price of 0.30). All documents were executed by June 30, 2021, with all equity/warrants issued by July 31, 2021. The Company issued 7,036,668 Common shares, and 3,576,733 Warrant shares in this transaction. Please note all Warrant Shares expired as of May 15, 2022 per the terms and conditions of the Warrant document.

 

2022 Convertible Notes

 

On June 15, 2022, the Company entered into two convertible promissory notes aggregating $300,000. The notes mature on the earlier of December 15, 2022 or 10 days after demand and bear interest at 8% per year. The Company received proceeds of $300,000. The notes are convertible into shares of common stock at a fixed conversion price of $0.30 per share. The Company has recorded debt discount of $200,000, related to the beneficial conversion feature of the notes. The discount will be amortized to interest expense over the six-month term of the notes, and $17,486 was amortized during the three and six months ended June 30, 2022.

 

 
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2021 Convertible Notes

 

On September 20, 2021, the Company entered a convertible promissory note with GS Capital Partners, LLC. The note matures on September 20, 2022 and bears interest at 8% per year. The Company received proceeds of $197,000, after deduction of $20,000 of original issue discount and $3,000 of costs. In connection with this note, the Company has issued a warrant to purchase 1,466,666 shares of common stock to the lender. The warrant has an exercise price of $0.15 per share and expires on September 21, 2026. The relative fair value of the warrant was $110,000, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.84%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 389%; and (4) an expected life of 5 years. The note is convertible into shares of common stock at a fixed conversion price of $0.10 per share. The company has recorded a beneficial conversion feature of $90,000. Amortization of discount and costs was $55,597 and $110,584 for the three and six months ended June 30, 2022, respectively.

 

During the fourth quarter of 2021, the Company entered into twenty convertible promissory notes with various holders aggregating $1,412,000. The notes mature one year from issuance and bear interest at 8% per year. The Company received proceeds of $1,287,000, after deduction of $117,000 of original issue discount and $8,000 of costs. In connection with the notes, the Company has issued warrants to purchase 10,463,332 shares of common stock to the lenders. The warrants have an exercise price of $0.15 per share and expire five years from the date of issuance. The relative fair value of the warrants was $1,366,127, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.84% - 1.33%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 386% - 389%; and (4) an expected life of 5 years. The notes are convertible into shares of common stock at a fixed conversion price of $0.10 per share. A total of $1,412,000 has been recorded as debt discount, and 8,000 has been recorded as deferred debt costs. The discount and costs will be amortized to interest expense over the term of the notes Amortization of discount and costs was $349,355 and $699,492 for the three and six months ended June 30, 2022, respectively.

 

During May 2022, the Company issued 457,500 shares of common stock upon the conversion of $45,000 of notes payable, plus $750 of costs. Unamortized discount and debt costs related to the principal converted were $21,206 and $514, respectively, which were charged against interest expense upon conversion.

 

The Company’s convertible promissory notes at June 30, 2022 and December 31, 2021 are as follows:

 

 

 

June 30,

2022

 

 

December 31,

2021

 

Convertible notes payable, bearing interest at 8- 10%

 

$1,887,000

 

 

$1,453,960

 

Unamortized debt discount

 

 

(785,303 )

 

 

(1,428,726 )

Unamortized deferred debt issuance cost

 

 

(3,254 )

 

 

(9,112 )

Total

 

 

1,098,443

 

 

 

194,162

 

Current portion

 

$1,098,443

 

 

$194,162

 

 

Note 8. Derivative Liabilities

 

The Company had identified certain embedded derivatives related to its convertible notes. Since the notes were convertible into a variable number of shares or have a price reset feature, the conversion features of those notes were recorded as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to adjust to fair value as of each subsequent balance sheet date.

 

The Company has recorded additions to the derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions totaled $49,157 and $97,254 for the three months ended June 30, 2021 and 2020, respectively, and $124,290 and $261,946 for the six months ended June 30, 2021 and 2020, respectively and were charged to interest expense.

 

During the three and six months ended June 30, 2021, through the date of settlement of the debt, the Company recorded income of $60,311 and $2,241,678 related to the change in the fair value of the derivatives. The fair value of the embedded derivatives was $1,728,274 at the date of settlement, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.01%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 315%; and (4) an expected life of 3 months.

 

 
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During the second quarter of 2021 the Company issued 7,036,668 shares of common stock, valued at $1,829,534 and 3,576,733 warrants, valued at $857,600, in settlement of $1,453,960 of notes payable and $653,454 of accrued interest. Derivative liability of $1,728,274 was extinguished because of the settlement. The Company recorded a gain on extinguishment of $1,148,554.

 

Note 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 2015, the Company commenced an action for the cancellation of shares issued to Soex (the “Shares”) in connection with a breached Securities Purchase Agreement and Distribution Agreement entered 2014.

 

The Soex Litigation was tried in U.S. District Court for the Middle District of Florida in October of 2018. The jury at the conclusion of the trial did not award monetary damages to either party for claims or counterclaims.

 

On October 24, 2018, the Company initiated a third lawsuit against an affiliate of Soex, Zhongshan Trans-Tech New Material Technology Co. Ltd. Zhongshan, China, (“Transtech”), and the Chairperson of the affiliate and Soex, based on new information learned by the Company. The Company will seek maximum relief and damages for this on-going and growing illegal misuse the Company’s Intellectual Property. The Company feels this third action will lead in a judgment in favor of the Company.

 

On October 8, 2021 the Company was notified of a unusual order by the Federal District Court judge who oversaw the initial 2018 proceedings. This activity was initiated at the request of Soex’s counsel. The Order awards the defendant (Soex) $300,568 in attorney’s fees and $82,096 in costs for a total award of $382,664 to be paid by Dais. The Order doesn’t specify the date by which the award needs to be paid. The sum is recorded in accrued liabilities.

 

The Company will vigorously defend itself against this Order, as well as move on all possible avenues open to it to stop, what Management believes, is an on-going misuse of the Company’s core Intellectual Property. The Company believes – based on the content of the Order and other admissions and actions on the part of others – it has a chance to prevail in an appeal to the benefit of the Company and its shareholders.

 

Accounts Payable

 

The firms below have pursued legal action against the Company to collect overdue accounts payable sums. The Company is working with each to enter into a settlement plan, or “pay over time” payment plan. To date the Company has an agreement in place with SoftinWay.

 

Company

 

Sum Owned

 

 

Payment Plan

 

Legal Action

 

Old Dominion Freight Line

 

$13,576.95

 

 

No

 

Yes

 

Power Plant Services

 

$85,199.11

 

 

No

 

Yes

 

SoftinWay

 

$4,850.00

 

 

Yes

 

Yes

 

The O-Ring Store

 

$10,334.00

 

 

No

 

Yes

 

Total

 

$113,960.06

 

 

 

 

 

 

 

 
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Note 10. Subsequent Events

 

On July 12, 2022 the Company was informed its loan forgiveness application had been accepted for its second and final Payroll Protection Plan loan.  The SBA has forgiven the loan amount in full.

 

On July 28, 2022 the Company accepted the following sums for general operation expenses:

 

$30,000 and $62,800 (total $92,800) from the PKT Strategic Technologies, LLC, the Senior Note Holder under the same terms and conditions as the existing sums of money which have been loaned to the Company since June 16, 2016.

 

$5,000 and $2,000 (total of $25,000) from Draper Capital Partners (under the same terms and conditions as the previous sums of money which have been loaned to the Company).

 

No other material events have occurred after June 30, 2022 requiring recognition or disclosure in the financials.  

 

 
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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 current and 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 the 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.

 

The Company is dependent on third parties to manufacture the key components needed for its nanostructured materials and some parts 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.

 

Covid-19 World-wide Pandemic

Effects from the pandemic are still impacting economies, and routine life, across the globe, however, improvements are being made and economies are opening.  The Company is uniquely positioned as its’ current products are designed to provide a solution to these issues especially with increased ventilation. The awareness of the benefits of increased ventilation in homes and workplaces are being cited as a major factor by customers as a solution to battle future outbreaks and other pandemics. The ConsERV products are specifically designed to increase new, fresh, ventilated, air in our homes and workplaces. Management is developing and executing on plans to increase product awareness through existing and prospective sales channels.

 

 
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Climate Change and Carbon Reduction

 

Countries and corporations around the world are adopting aggressive plans to achieve newly established Carbon Neutral goals by 2030 and 2050. This world-wide effort is attracting attention to innovative technologies which reduce carbon emissions. Management is confident the successful track record of current products, with a history of increasing the efficiency of HVAC systems and reducing CO2 emissions should drive increased business activity.

 

Volatile Share Price

 

Beginning in mid-October of 2021 the Company’s share price on the OTCM has risen from a low of $.05 per share to a high price of $3.15 per share, and places in between. We believe the market for the Company’s products and planned products is broadening worldwide, spawning increased interest in Dais. This coupled with Management executing against its business plan working to grow revenues increasing shareholder value are what we believe may be the reason for a potential jagged up and down nature of the Company’s share price. 

 

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, and is effective in the destruction of pathogens that come in contact with the material, (As verified by 3rd part analysis).

 

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. We continue to develop other Aqualyte uses in cross-industry applications, HVAC/Refrigeration, energy, etc. One area of focused attention has been development work on a variant of Aqualyte targeting surface treatments to potentially create a protective layer designed to inactivate human coronaviruses.

 

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 the ensuing years the Company has purchased and/or sold assets for cash and/or assumption of certain company’s obligations seeking a path to solid, continuing growth, or monetize non-performing Company assets.

 

 
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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.

 

Our Technology

 

AqualyteTM

 

We use proprietary nanotechnology to reformulate thermoplastic materials called polymers, creating a material which water and a select group of similar substances can permeate through at a molecular level as opposed to flowing in bulk as liquid water through a pore. At the same time, the permeability of oxygen, nitrogen, and most other substances is severely limited, making the material extremely selective. We call this specialized material AqualyteTM and we have been granted a series of patents relating to its manufacture and use.

 

AqualyteTM is the foundation of the Dais product line, using the unique material’s properties to enable differentiated air, energy, and water products. Products generally are highly efficient, have fewer or no moving parts, and notably are kinder and gentler to our planet Earth. The nanomaterial-based products market is growing worldwide as more eyes are on the accelerating push for highly efficient products like those Dais features.

 

ConsERVTM

 

Sales channels for our ConsERV product continues to expand. This is our HVAC energy conservation product which should save an average of 30% on HVAC ventilation air operating costs while providing increased amounts of ventilated air. The economic 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 and is useful in both commercial and residential structures, to provide improved ventilation air within the structure. In turn, this yields health benefits (reduced COVID-19 exposure, fewer allergy, and asthma ‘trigger’ contaminants) and productivity improvements (improvement in cognitive abilities).

 

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 heating requirements.

 

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 market, as near as management can tell, for energy recovery ventilation equipment is changing to become broader and better understood. Management believes this change is linked to the industry’s specification-setting body (ASHRAE) and the US Centers for Disease Control stating that pathogens can and do travel via HVAC systems and duct work as reported by the White House Science Advisory Panel, the US EPA, NIH/Harvard, Trane Corporation, and more. This potential change in the market for ERVs coupled with the seemingly proven value proposition Dais’s ConsERV product provides optimism to the Management team and the Board of Directors for the future of the ConsERV product.

 

 
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The Company began engineering for an updated line of ConsERV products in the year 2020 (known as the “N Series”) with new cores and packaged systems that incorporate the Company’s past experience with the ERV market. The line was certified by the needed outside agencies and initial market introduction began in the 4th quarter of 2021. We have seen positive market reception to date, and believe based on the N Series performance, price-point, and end-user feedback, the product will continue to be well received in the market. Sales of existing cores and customer systems are expected to continue generating revenue during 2022 and beyond as we increase the number of sales channels for ConsERV. The newer N Series has begun contributing to increasing revenues in the second quarter of 2022 and beyond.

 

Product Summary

 

Dais’s advanced material has many demonstrated uses in the described products. Management is positioning most 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.

 

Sales activities for advanced materials are continuing with select, successful companies located in the European Union and Southeast 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 nanomaterials, we have qualified manufacturing companies to join our supply chain to produce materials and components. Guided by Dais-qualified manufacturing practices these efforts target the growing demand for product in North America, European Union, and Southeast 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.

 

 
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Results of Operations

 

Three Months Ended June 30, 2022 Compared to June 30, 2021

 

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

 

 

 

For the Three Months Ended

 

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

Sales

 

$117,699

 

 

$109,181

 

Royalty and license fees

 

 

12,500

 

 

 

12,500

 

 

 

 

130,199

 

 

 

121,681

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

177,205

 

 

 

45,030

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

 

(47,006 )

 

 

76,651

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Research and development, net of government grant proceeds of $0 and $29,886, respectively

 

 

61,748

 

 

 

26,329

 

Selling, general and administrative

 

 

403,349

 

 

 

1,023,687

 

TOTAL OPERATING EXPENSES

 

 

465,097

 

 

 

1,050,016

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(512,103 )

 

 

(973,365 )

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest expense

 

 

(686,176 )

 

 

(159,956 )

Change in fair value of derivative liabilities

 

 

-

 

 

 

60,311

 

Gain on extinguishment of debt

 

 

-

 

 

 

1,148,554

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER INCOME (EXPENSE), NET

 

 

(686,176 )

 

 

1,048,909

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$(1,198,279 )

 

$75,544

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER COMMON SHARE, BASIC

 

$(0.12 )

 

$0.02

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE, DILUTED

 

$(0.12 )

 

$(0.13 )

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC

 

 

9,717,827

 

 

 

3,691,248

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, DILUTED

 

 

9,717,827

 

 

 

16,964,471

 

 

Revenue

 

We generate our revenues primarily from the sale of our ConsERV cores and systems and Aqualyte membrane. Product sales were $117,699 and $109,181 for the three months ended June 30, 2022 and 2021, respectively, an increase of $8,518 or 8%. The increase in revenue was driven by a decrease in Aqualyte sales, offset by an increase in ConsERV sales. We are focusing on creating sustainable revenues with Aqualyte and ConsERV core and system sales with the expectation that this will allow for growth in 2022 and beyond.

 

Revenues from royalty and license fees were $12,500 and $12,500 for the three months ended June 30, 2022 and 2021, respectively.

 

 
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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 and Aqualyte nanomaterial. Cost of goods sold were $177,205 and $45,030 for the three months ended June 30, 2022 and 2021 respectively, an increase of $132,175 or 294%. This reflects price increases throughout our supply chain, general increases in labor costs, and labor costs recognized in the second quarter of 2022 for products and services to be delivered in the third quarter.  

 

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 loss from the sales of products was $47,006 for the three months ended June 30, 2022 and gross margin was $76,651 for the three months ended June 30, 2021 representing negative 6% and 63% for the three months ended June 30, 2022 and 2021.

 

As we are actively monitoring our increases in production cost, we have raised the prices for our ConsERV product line while continuing to work within our supply chain to reduce these costs. Although our gross margin for the three months ended June 30, 2022 is negative, we anticipate the revenues received from products delivered in the third quarter will increase our gross margin, bringing it positive again.

 

Research and development costs

 

Expenditures for research and development are expensed as incurred. We incurred research and development costs of $61,748 and $56,215 for the three months ended June 30, 2022 and 2021, an increase of $5,533 or 10%. 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 $0 and $29,886 for the three months ended June 30, 2022 and 2021, a decrease of $29,886 or 100%. Variances in grant expenditures and reimbursements are due to an emphasis on completing an existing Small Business Innovation Research (SBIR) Phase II grant. This grant was completed in August 2021.

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses consist primarily of payroll and related benefits, 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 $403,349 and $1,023,687 for the three months ended June 30, 2022 and 2021, a decrease of $620,338 or 61%. This decrease is primarily due to stock based compensation issued in the second quarter of 2021.

 

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

 

 

·

Additional infrastructure needed to support the expanded commercialization of our ConsERV and Aqualyte products and/or new product applications of our polymer technology for, among other things, administrative personnel, physical space, marketing and channel support and information technology;

 

 

 

 

·

The issuance and recognition of expenses related to fair value of new share-based awards, which is based on various assumptions including, among other things, the volatility of our stock price; and

 

 

 

 

·

Additional expenses because of being an SEC reporting company, including, but not limited to, director and officer insurance, director fees, SEC compliance expenses, transfer agent fees, additional staffing, professional fees, and similar expenses.

 

 
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We continue to focus on decreasing selling, general and administrative expenses for all our product efforts.

 

Other Income (Expense)

 

Other expense for the three months ended June 30, 2022 was $686,176 compared to income of $1,048,909 for the three months ended June 30, 2021, a decrease of $1,735,085 or 165%. The increased net other expense is primarily due to the lack of income relating to the change in fair value of derivative liabilities and an increased interest expense.

 

Net Income (Loss)

 

Net loss for the three months ending June 30, 2022 was $1,198,279 compared to an income of  $75,544 for the three months ended June 30, 2021. The increased loss in the three months ended June 30, 2022 was primarily due to the increase in other expense described above and negative gross margin.

 

Six Months Ended June 30, 2022 Compared to June 30, 2021

 

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

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

Sales

 

$160,894

 

 

$171,990

 

Royalty and license fees

 

 

25,000

 

 

 

25,000

 

 

 

 

185,894

 

 

 

196,990

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

229,645

 

 

 

82,890

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

 

(43,751 )

 

 

114,100

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Research and development, net of government grant proceeds of $0 and $60,966, respectively

 

 

126,621

 

 

 

39,846

 

Selling, general and administrative

 

 

828,625

 

 

 

1,285,074

 

TOTAL OPERATING EXPENSES

 

 

955,246

 

 

 

1,324,920

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(998,997 )

 

 

(1,210,820 )

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,281,812 )

 

 

(360,808 )

Change in fair value of derivative liabilities

 

 

-

 

 

 

2,241,678

 

Gain on extinguishment of debt

 

 

-

 

 

 

1,148,554

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER INCOME (EXPENSE), NET

 

 

(1,281,812 )

 

 

3,029,424

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$(2,280,809 )

 

$1,818,604

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER COMMON SHARE, BASIC

 

$(0.24 )

 

$1.29

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE, DILUTED

 

$(0.24 )

 

$(0.17 )

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC

 

 

9,567,149

 

 

 

1,994,429

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, DILUTED

 

 

9,567,149

 

 

 

278,128

 

 

 
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Revenue

 

We generate our revenues primarily from the sale of our ConsERV cores and systems and Aqualyte membrane. Product sales were $160,894 and $171,990 for the six months ended June 30, 2022 and 2021, respectively, a decrease of $11,096 or 6%. The decrease in revenue was driven by a decrease in Aqualyte sales, offset by an increase in ConsERV sales. We are focusing on creating sustainable revenues with Aqualyte and ConsERV core and system sales with the expectation that this will allow for growth in 2022 and beyond.

 

Revenues from royalty and license fees were $25,000 and $25,000 for the six months ended June 30, 2022 and 2021, 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 and Aqualyte nanomaterial. Cost of goods sold were $229,645 and $82,890 for the six months ended June 30, 2022 and 2021 respectively, an increase of $146,755 or 177%. This reflects price increases throughout our supply chain, general increases in labor costs, and labor costs recognized in the second quarter of 2022 for products and services to be delivered in the third quarter. 

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 loss from the sales of products was $43,751 for the six months ended June 30, 2022 and gross margin was $114,100 for the six months ended June 30, 2021 representing negative 23% and 58% for the six months ended June 30, 2022 and 2021.

 

As we are actively monitoring our increases in production cost, we have raised the prices for our ConsERV product line while continuing to work within our supply chain to reduce these costs. Although our gross margin for the six months ended June 30, 2022 is negative, we anticipate the revenues received from products delivered in the third quarter will increase our gross margin, bringing it positive again.

 

Research and development costs

 

Expenditures for research and development are expensed as incurred. We incurred research and development costs of $126,620 and $100,812 for the six months ended June 30, 2022 and 2021, an increase of $25,808 or 26%. 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 $0 and $60,966 for the six months ended June 30, 2022 and 2021, a decrease of $60,966 or 100%. Variances in grant expenditures and reimbursements are due to an emphasis on completing an existing Small Business Innovation Research (SBIR) Phase II grant. This grant was completed in August 2021.

 

 
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Selling, general and administrative expenses

 

Our selling, general and administrative expenses consist primarily of payroll and related benefits, 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 $828,625 and $1,285,074 for the six months ended June 30, 2022 and 2021, a decrease of $456,449 or 36%. This decrease is primarily due to stock based compensation issued in the second quarter of 2021.

 

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

 

 

·

Additional infrastructure needed to support the expanded commercialization of our ConsERV and Aqualyte products and/or new product applications of our polymer technology for, among other things, administrative personnel, physical space, marketing and channel support and information technology;

 

 

 

 

·

The issuance and recognition of expenses related to fair value of new share-based awards, which is based on various assumptions including, among other things, the volatility of our stock price; and

 

 

 

 

·

Additional expenses because of being an SEC reporting company, including, but not limited to, director and officer insurance, director fees, SEC compliance expenses, transfer agent fees, additional staffing, professional fees, and similar expenses.

 

We continue to focus on decreasing selling, general and administrative expenses for all our product efforts.

 

Other Income (Expense)

 

Other expense for the six months ended June 30, 2022 was $1,281,812 compared to income of $3,029,424 for the six months ended June 30, 2021, a decrease of $4,311,236 or 142%. The increased net other expense is primarily due to the lack of income relating to the change in fair value of derivative liabilities and an increased interest expense.

 

Net Income (Loss)

 

Net loss for the six months ending June 30, 2022 was $2,280,809 compared to an income of  $1,818,604 for the six months ended June 30, 2021. The increased loss in the six months ended June 30, 2022 was primarily due to the increase in other expense described above and negative gross margin.

 

 
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Liquidity and Capital Resources

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred significant losses since inception, incurred a loss of $2,280,809 for the six months ended June 30, 2022 and, as of June 30, 2022, the Company has an accumulated deficit of $60,103,911, total stockholders’ deficit of $10,428,954, negative working capital of $10,351,150 and cash of $44,150. The Company used $991,845 and $393,957 of cash in operations during the six months ended June 30, 2022 and 2021, respectively, which was funded primarily by proceeds from loans from related parties and others. There is no assurance that any such financing will be available in the future. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently pursuing the following sources of short and long-term working capital: 

 

 

1.

The Company is actively working with selected targeted parties who are interested in licensing, purchasing the rights to, or establishing a joint venture to commercialize applications of the Company’s technology;

 

 

 

 

2.

The Company continues to seek capital from certain strategic and/or government grant opportunities and related sources. These sources may, pursuant to any agreements that may be developed in conjunction with such funding, assist in the product definition and design, roll-out and channel penetration of products; and

 

 

 

 

3.

The Company increased its value and potential to attract new investors when it completed the exchange program of ‘debt to equity’ in the 2nd quarter of 2021 clearing out all convertible debt in exchange for equity at a fixed price at the end of the second quarter of 2021. This has helped the Company attract growth capital it could not prior to this ‘debt to equity’ exchange.  

 

Management and the Board believe:  

 

 

1.

In the face of current world events (financial market see-sawing, war, China slow-down, supply chain challenges, etc.)  our products remain in demand.

 

 

 

 

2.

The Company’s ability to raise new funds while improved by the solution of the Company’s previous convertible note matter and the uptick in new orders for product, remains challenged. World events find varying degrees of effect on the Company’s going forward ability to raise reasonably priced growth capital in the amount(s) required.  This is a challenging time to raise growth capital and become profitable.  

 

 

 

 

3.

We believe our current cash position, and our projected ability to attract additional growth capital accelerating sustainable revenue generation (cash flow) from operations and investments, is adequate through the end of the third quarter 2022. At which time the combination of our progress in the market, greater and stronger market validation of our industry changing benefits, and cautiously optimistic optimism that the recent downturn of the public markets worldwide will have turned, finding additional growth capital will be in place.

 

 

 

 

4.

The Company entered into a Loan and Security Agreement in June 2016 pursuant to which the Company issued a Senior Secured Promissory Note that granting the Holder a secured interest in all the assets of the Company. All Parties are working to resolve open issues in the late 3rd quarter or early 4th quarter of 2022.  

 

 

 

 

 

5.

The supply chain impact of recent world events is affecting the Company’s ability to produce product for its customers. Inability to timely acquire specified components may find the Company needing to redesign and recertify its products, or to stop production until the supply chain matter is resolved. In either event this will cause loss of sales revenue, potentially key Dais team members, and customers. The Company has successfully implemented several workarounds including sourcing ‘similar but when installed equal’ components with new vendors to supply needed components. Additionally, the Company is collaborating with its highest profile suppliers to accelerate improved paths to minimize the impact of this situation.

 

We believe the recurring Supply chain shortages, and the impact of the inflationary spiral has and is impacting the Company’s growth plans, operations, revenues, and relationships with its customers. We have experienced low staffing levels at vendors’ companies, sudden cancellation of long lead time, high value engineered components with no future delivery times provided, rapid price increases in key commodity-like components, and a significant hourly labor increase.

 

We believe this upward spiral of the costs, and uncertainty for costs and delivery will continue to have an impact on the Company, and its customers until at least the end of 2022.  

 

Management has and continues to work to diversify existing, and new partners, to identify multiple sources of materials and components, and to create alternative solutions for customers. Increase crude oil prices continue to influence the cost of resins, plastics, and fuel. Shipping and trucking costs have increased, capacity has contracted, and shipping times have increased. These issues are increasing costs across industries. Management has adjusted prices and lead times and will continue to monitor the situation.

 

 
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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, or experience a major supply chain disruption will have material adverse consequences on our financial condition, results of operations and cash flows as could any unfavorable terms. While we believe the Company’s prospects have improved for funding, there are no assurances we will be able to obtain the financing and planned product development commercialization, and the sales channel challenges continue to mount.  The Company may fail to reach an accord with the Senior Secured Note Holder who has deep rights with the assets of the Company pledged as security for repayment of the Note. Accordingly, we may not have the ability to continue as a going concern. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

 

Statement of Cash Flows

 

Cash as of June 30, 2022 was $44,150 compared to $773,423 as of December 31, 2021. Cash is primarily used to fund our working capital requirements.

 

Net cash used in operating activities was $991,845 for the six months ended June 30, 2022 compared to $393,957 for the same period in 2021. The increase in net cash used was primarily due to an increase in net loss (after adjusting for non-cash items) partially offset by an increase in cash from net working capital accounts. For the six months ended June 30, 2022, net loss (after adjusting for non-cash items) was $1,438,548. Accounts receivable, inventory and other assets together increased by $197,495. Accounts payable, accrued liabilities, customer deposits and deferred revenue increased in total by $644,198. For the six months ended June 30, 2021, net loss (after adjusting for non-cash items) was $685,276. Accounts receivable, inventory and other assets together increased by $64,756. Accounts payable, accrued liabilities, customer deposits and deferred revenue increased in total by $356,075.

 

Net cash used in investing activities was $37,428 for the six months ended June 30, 2022 compared to $12,064 for the same period in 2021, driven by an increase in purchases of equipment.

 

Net cash provided by financing activities was $300,000 for the six months ended June 30, 2022 compared to $458,437 for the same period in 2021. The decrease resulted from a decrease in proceeds from notes payable and notes payable due to related parties.

 

Financing and Capital Transactions

 

Paycheck Protection Program Loan

 

On January 25, 2021, the Company received $122,340 in a loan borrowed from a bank pursuant to the Paycheck Protection Program under the CARES Act guaranteed by the Small Business Administration (“SBA”), which we expect to be forgiven in part or in full, subject to our compliance with the conditions of the Paycheck Protection Program. If not forgiven, the terms on the note provide for interest at 1% per year and the note mature in 24 months, with 18 monthly payments of $8,146 beginning after the initial 6-month deferral period for payments. This loan was subsequently forgiven in full on July 12, 2022.

 

On April 29, 2020, the Company received $144,750 in a loan borrowed from a bank pursuant to the Paycheck Protection Program under the CARES Act guaranteed by the Small Business Administration (“SBA”). This loan was subsequently forgiven in full on August 29, 2021. 

 

 
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Small Business Administration Loan

 

On June 12, 2020, the Company received $150,000 in a loan borrowed from the SBA. Installment payments, including principal and interest, of $731 monthly, will begin 12 months from the date of the note. The balance of principal and interest will mature 30 years from the date of the note. Interest will accrue at the rate of 3.75% per year. On March 15, 2022, the U.S. Small Business Administration announced that the deferment period for the repayment would be extended to 30 months from the date of the note.

 

Related Party Note

 

On June 24, 2016, the Company entered into a Loan and Security Agreement (“Security Agreement”) with the entity known as PKT Strategic Assets, LLC (the “Holder”) pursuant to which the Company issued a Senior Secured Promissory Note for $150,000 (the “Note”). The Note has an interest rate is 12% per annum compounded daily with a minimum interest payment of $2,000. The Note grants the Holder a secured interest in all the assets of the Company. During 2016 to the period ended June 30, 2022, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount and interest totaled $4,532,333 (including fees and other expenses). The Holder’s corporation is controlled by Ms. Tangredi, related to Tim Tangredi: the Company’s CEO and stockholder, and therefore, is a Related Party of the Company. The Company is to pay the Holder the principal, plus all interest and fees due in accordance with terms and conditions of the Security Agreement on the earlier of: (i) the date upon which the Company secures funds, regardless of source, equal to or exceeding, in the aggregate, $1,000,000 or (ii.) November 1, 2021 which has expired. The Holder has not declared the Note in Default as the Parties have reached a tentative agreement to several issues including the extension of the Maturity Date (the “Maturity Date”). The Parties are working to complete this agreement during the third quarter of 2022. The Company has recorded interest expense of $220,395 and $66,370 for the three-month periods ended June 30, 2022 and 2021, respectively and $369,461 and $130,353 for the six-month periods ended June 30, 2022 and 2021, respectively.  We made a payment of fees and accrued interest totaling $154,398 during the six months ended June 30, 2022. Accrued interest was $2,367,436 and $2,152,373 at June 30, 2022 and December 31, 2021, respectively.

 

JMS Investments

 

Between April of 2021 and September 30, 2021, JMS Investments of Staten Island, NY, USA invested $376,000 in seven separate transactions. The sums are repayable in the form of one-year demand notes having an interest rate of 8.5%.

 

On August 30, 2021, the Company entered a promissory note with GEX Management, Inc. The note matured on February 28, 2022 and bears interest at 10% per year. The note was repaid in December 2021. In connection with this note, the Company has agreed to issue 1,000,000 shares of common stock to the lender. These shares have not been issued at June 30, 2022. The shares to be issued have been valued at $120,990, which has been recorded as debt discount. The discount has been fully amortized in 2021. The value of the shares has been included in accrued expenses at December 31, 2021. 

 

2022 Convertible Notes

 

On June 15, 2022, the Company entered into two convertible promissory notes aggregating $300,000. The notes mature on the earlier of December 15, 2022 or 10 days after demand and bear interest at 8% per year. The Company received proceeds of $300,000. The notes are convertible into shares of common stock at a fixed conversion price of $0.30 per share. The Company has recorded debt discount of $200,000, related to the beneficial conversion feature of the notes. The discount will be amortized to interest expense over the six-month term of the notes, and $17,486 was amortized during the three and six months ended June 30, 2022.

 

 
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2021 Convertible Notes

 

On September 20, 2021, the Company entered a convertible promissory note with GS Capital Partners, LLC. The note matures on September 20, 2022 and bears interest at 8% per year. The Company received proceeds of $197,000, after deduction of $20,000 of original issue discount and $3,000 of costs. In connection with this note, the Company has issued a warrant to purchase 1,466,666 shares of common stock to the lender. The warrant has an exercise price of $0.15 per share and expires on September 21, 2026. The relative fair value of the warrant was $110,000, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.84%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 389%; and (4) an expected life of 5 years. The note is convertible into shares of common stock at a fixed conversion price of $0.10 per share. The company has recorded a beneficial conversion feature of $90,000. Amortization of discount and costs was $55,597 and $110,584 for the three and six months ended June 30, 2022, respectively.

 

During the fourth quarter of 2021, the Company entered into twenty convertible promissory notes with various holders aggregating $1,412,000. The notes mature one year from issuance and bear interest at 8% per year. The Company received proceeds of $1,287,000, after deduction of $117,000 of original issue discount and $8,000 of costs. In connection with the notes, the Company has issued warrants to purchase 10,463,332 shares of common stock to the lenders. The warrants have an exercise price of $0.15 per share and expire five years from the date of issuance. The relative fair value of the warrants was $1,366,127, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.84% - 1.33%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 386% - 389%; and (4) an expected life of 5 years. The notes are convertible into shares of common stock at a fixed conversion price of $0.10 per share. A total of $1,412,000 has been recorded as debt discount, and 8,000 has been recorded as deferred debt costs. The discount and costs will be amortized to interest expense over the term of the notes Amortization of discount and costs was $349,355 and $699,492 for the three and six months ended June 30, 2022, respectively.

 

During May 2022, the Company issued 457,500 shares of common stock upon the conversion of $45,000 of notes payable, plus $750 of costs. Unamortized discount and debt costs related to the principal converted were $21,206 and $514, respectively, which were charged against paid in capital upon conversion.

 

The sums advanced by GS Capital Partners and JMS Investments together form a “bridge loan” for use by the Company to, among other actions, bring all filings current to return to fully reporting status with the SEC and OTC, and allow the Company to obtain the critical resources which allow Dais to grow as management and the bridge investors believe is possible using the company’s proven nanotechnology in sustainable product in a worldwide market. Currently, JMS Investments, the Company, and the Senior Secured Note Holder are negotiating the definitive investment plan along with terms and uses of proceeds. It is expected the full investment plan will be ready for announcement in the third quarter of 2022.

 

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.

 

 
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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 June 30, 2022 , 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.

 

 
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ITEM 6. EXHIBITS

 

Exhibit

 

 

 

Incorporated by Reference

 

Filed or

Furnished

Number

 

Exhibit Description

 

Form

 

Exhibit

 

Filing Date

 

Herewith

31.1

 

Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a))

 

 

 

 

 

 

 

31.2

 

Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a))

 

 

 

 

 

 

 

32.1

 

Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

 

 

 

 

 

32.2

 

Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase Document.

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

 

 

 

 

 

 

 

_________________

*

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

 
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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.

 

 

DAIS CORPORATION

 

 

 

 

 

Date: August 18, 2022

By:

/s/ Tim N. Tangredi

 

 

 

Tim N. Tangredi

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

(Principal Financial and Accounting Officer)

 

 

 
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