DAIS Corp - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2023

For the transition period from _______ to _______

Commission File No. 000-53554

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes ☒     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.

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 20,464,365 shares of the Registrant’s $0.01 par value common stock outstanding as of August 14, 2023.

DAIS CORPORATION

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 DAIS CORPORATION

CONDENSED BALANCE SHEETS

(Unaudited)

See accompanying Notes to Unaudited Condensed Financial Statements

DAIS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying Notes to Unaudited Condensed Financial Statements

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.          

DAIS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying Notes to Unaudited Condensed Financial Statements

Dais Corporation

Notes to Condensed Financial Statements

June 30, 2023 and 2022

(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, 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 30, 2023. The results of operations for the three and six-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for any future quarters or for the entire year ending December 31, 2023.

Note 2. Going Concern and Management’s Plans

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2023, the Company generated a net loss of $2,971,122 and has incurred significant losses since inception. As of June 30, 2023, the Company has an accumulated deficit of $65,245,787, total stockholders’ deficit of $13,730,890, negative working capital of $13,730,351 and cash and cash equivalents of $37,055. The Company used $1,158,656 and $991,845 of cash for operations during the six months ended June 30, 2023, and 2022, 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:

Management believes:

We believe the Company’s prospects to secure growth funding remain good. On a macro level we believe the world-wide market for the equipment type the Company is selling (and developing) has changed for the positive in the last two years reflecting end user awareness of the need to address Climate Change related issues faster, and the changes in buying habits forged by the world-wide pandemic. On more of a micro level the company has shown solid progress over the last three quarters, removed a serious impediment to growth by completing a ‘debt to equity’ program where the convertible noteholders debt positions were converted into equity (common stock and warrants). The company introduced a popular new line of our ConsERV equipment having improved performance and pricing to a growing independent sales channel through-out North America. We reached agreement (now moving to contract stage) in late 4Q 2022 between the company and its Senior Secured Note Holder (having deep rights with the assets of the Company which are pledged as security for repayment of the Note). The company is continuing to develop the basis of a long-term business relationship with a well-known, multi-national corporation interested in using the Company’s HVAC and water products for its own and third-party use.

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

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.

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, 2023 and December 31, 2022, which is included in accrued expenses, other.

Royalty revenue is recognized as earned. The Company recognized royalty revenue of $0 for the three and six months ended June 30, 2023 and 2022, 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, 2023 and 2022, respectively and $25,000 and $25,000 for the six months ended June 30, 2023 and 2022, respectively.

The Company accounts for revenue arrangements with multiple elements under the provisions of the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Topic 605-25, “Revenue Recognition-Multiple-Element Arrangements.” 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 a certain amount of Product from Menred.  The Agreement has a ten-year term with mutually agreed upon five-year extensions.

Cash and cash equivalents - For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally insured limits. The Company had no uninsured balances at June 30, 2023 and December 31, 2022. The Company has never experienced any losses related to these balances. The Company does not have any cash equivalents at June 30, 2023 and December 31, 2022.

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, 2023 and December 31, 2022 the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.

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 $2,537 and $2,317 for the three months ended June 30, 2023 and 2022, respectively, and $5,119 and $4,167 for the six months ended June 30, 2023 and 2022, 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 2023 or 2022.

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:

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. The 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, 2023 and 2022, respectively and $24,396 and $24,396 for the six months ended June 30, 2023 and 2022, 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, 2023 and December 31, 2022 of $2,175,691 and $2,140,687, 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 secure interest in all the assets of the Company. During 2016 to the period ended June 30, 2023, the Holder extended the Note pursuant to various amendments. Pursuant to the amendments, the principal amount and interest totaled $6,913,128 and $5,429,661 (including fees and other expenses) at June 30, 2023 and December 31, 2022, respectively. We received advances aggregating $884,960 during the six months ended June 30, 2023, and repaid $154,398 during the six months ended June 30, 2022. Financing cost of $38,050 was deducted from the 2023 advances. 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:

Of the 2023 advances, funds in the amount of $592,960 originally came from Ethos Business Ventures. It was a last-minute change of plan to assist the Company meet its obligations in a timely manner. This last-minute change was made necessary by an administrative error at the bank of PKT Strategic Assets, LLC. who was to have been the lender of record, and is the lender of the Company’s senior secured promissory note and security agreement.  To correct this error, management of Dais (with BOD approval), Ethos, and PKT agreed on April 3, 2023, that effective immediately, the ownership of the $592,960 sum will be transferred to PKT Strategic Assets, LLC at no cost or term and condition alteration except as it pertains to relevant language to effect the change in ownership.  The definitive paperwork will be complete in 3Q 2023. Dais is to pay a minimum of $6,000 per month in interest only to PKT Strategic Assets, LLC.  This change will be fully reported in 3Q 2023 Form 10Q.  

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, 2023 and 2022, respectively, and was $300 for each of the three-month periods ended June 30, 2023 and 2022, respectively. Accrued interest was $2,250 and $1,950 at June 30, 2023 and December 31, 2022, 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 change. The Company has waived the conversion requirement from 2015 to the present.

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.

On January 27, 2022, the Board approved the distribution of Series F Convertible Preferred Warrants to Board members, the Dais Team, and those contractually bound to receive these warrants on January 27, 2022.  These new Series were approved by NYS Division of Corporations on March 23, 2022.

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, 2023 and December 31, 2022, the Company’s Board of Directors authorized 10,000,000 shares of preferred stock with a par value of $0.01 to be issued in series with terms and conditions to be determined by the Board of Directors.

2,000,000 of the shares of preferred stock has been designated as Class A Preferred Stock. The Class A Preferred Stock shall entitle the holder thereof to 150 votes on all matters submitted to a vote of the stockholders of the Company.

10,000 of the shares of preferred stock has been designated as Class B Preferred Stock. The Class A Preferred Stock shall entitle the holder thereof to 150 votes on all matters submitted to a vote of the stockholders of the Company. The Class B Stock includes the right to vote in an amount equal to 51% of the votes to approve certain corporate actions, including, without limitation, changing the name of the Company and increasing the number of authorized shares.

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

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

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

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”).

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) and 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. Series F Convertible Preferred Stock consisting of 1,500,000 shares which were approved in the first quarter of 2023 and held pending the closing. These shares  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. Issuances within Series C, and E were completed earlier in 2023, there has been no need to issue any Series D, and Series F has been agreed to and will be issued in Q3 of 2023.

Common Stock

At June 30, 2023 and December 31, 2022, the Company’s Board of Directors authorized 1,100,000,000 shares of common stock with a par value of $0.01 to be issued in series with terms and conditions to be determined by the Board of Directors.

2023 Common Stock Transactions

During the three months ended June 30, 2023, an aggregate of 1,202,595 shares of common stock were issued upon the conversion of $23,250 of notes payable, $1,385 of related accrued interest, and $1,500 of fees. The value of the shares issued was $100,072, and we recorded a loss on conversion of $73,937.

During the three months ended March 31, 2023, an aggregate of 5,344,939 shares of common stock were issued upon the conversion of $143,752 of notes payable, $8,610 of related accrued interest, and $5,250 of fees. The value of the shares issued was $1,004,853, and we recorded a loss on conversion of $847,241.

During 2023, the Company  reissued 1,000,000 shares of common stock that had been cancelled in 2022.

In connection with a loan received in January 2023, the Company agreed to issue 2,000,000 shares of common stock valued at $196,000, calculated by the open market share value on the date of the grant. As of March 31, 2023, 500,000 shares have been issued and the remaining 1,500,000 shares, valued at $147,000, are classified as Common Stock To Be Issued.

During March of 2023, the Company issued 577,500 shares of common stock upon the cashless exercise of 733,333 warrants.

During March of 2023, the Company issued 450,000 shares of common stock, valued at $13,500, for services, calculated by the open market share value on the date of the grant.

During March of 2023, the Company issued 200,000 shares of common stock for cash. The proceeds had been advanced to the Company in December 2021.

During April of 2023, the Company issued 570,000 shares of common stock, valued at $67,400, for services, calculated by the open market share value on the date of the grant.

2022 Common Stock Transactions

During May of 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 were reissued in 2023 (see above).

Options and Warrants

In January 2023, the Company issued a warrant to purchase 800,000 shares of common stock, in connection with the amendment of a convertible note. The warrant has a term of five years and has a cash exercise price of $0.10 per share or a cashless exercise price of $0.20 per share. The fair value of the warrant was $78,395, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 3.9% - 1.33%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 362%; and (4) an expected life of 5 years.  

During March of 2023, 733,333 warrants were exercised on a cashless basis into 577,500 shares of common stock.

In April of 2023, the Company issued a warrant to purchase 555,556 shares of common stock, in connection with the issuance of a convertible note. The warrant has a term of five years and has a cash exercise price of $0.10 per share. The relative fair value of the warrant was $29,100, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 3.6%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 371%; and (4) an expected life of 5 years. The value of the warrant has been recorded as debt discount.

In April of 2023, the Company issued a warrant to purchase 500,000 shares of common stock, in connection with the issuance of a convertible note. The warrant expires January 5, 2028, and has a cash exercise price of $0.10 per share or a cashless exercise price of $0.20 per share. The relative fair value of the warrant was $16,935, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 3.6%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 376%; and (4) an expected life of 4.75 years. The value of the warrant has been recorded as debt discount.

In April of 2023, the Company issued a warrant to purchase 2,000,000 shares of common stock, in connection with the issuance of a convertible note. The warrant has a term of five years and has a cash exercise price of $0.10 per share or a cashless exercise price of $0.20 per share. The relative fair value of the warrant was $67,741, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 3.51%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 376%; and (4) an expected life of 5 years. The value of the warrant has been recorded as debt discount.

Note 7. Convertible Notes Payable

2023 Convertible Notes

In April of 2023, the Company entered into a convertible promissory note in the amount of $55,556. The note matures on March 30, 2024, and bears interest at 12% per year. The note has an original issue discount of $5,556 and debt costs of $3,500 were deducted from the proceeds. Also, $2,550 was paid directly by the lender to a vendor of the Company. The Company received proceeds of $43,950. The note is convertible into shares of common stock at a fixed conversion price of $0.05 per share. In connection with the note, the Company issued a warrant to purchase 555,556 shares of common stock, described in Note 6. The relative fair value of the warrant, $29,100 has been recorded as debt discount. The Company has also recorded a discount of $20,900 related to the beneficial conversion feature of the note. Total discount and costs of $59,056 will be amortized over the life of the note. During the three months ended June 30, 2023, the Company amortized $14,764 of discount and costs to interest expense.

In April of 2023, the Company entered into a convertible promissory note in the amount of $100,000. The note matures on April 28, 2024, and bears interest at 8% per year. The note is convertible into shares of common stock at a fixed conversion price of $0.05 per share. In connection with the note, the Company issued a warrant to purchase 2,000,000 shares of common stock, described in Note 6. The relative fair value of the warrant, $67,741 has been recorded as debt discount. The Company has also recorded a discount of $32,259 related to the beneficial conversion feature of the note. Total discount of $100,000 will be amortized over the life of the note. During the three months ended June 30, 2023, the Company amortized $16,668 of discount and costs to interest expense.

2022 Convertible Notes

On December 12, 2022, the Company entered a convertible promissory note in the amount of $40,000. The Note was amended in January of 2023. The note matures on January 5, 2024, and bears interest at 8% per year. The note is convertible into shares of common stock at a fixed conversion price of $0.05 per share. As consideration for the amendment, the Company issued a warrant to purchase 800,000 shares of common stock. The warrant has a term of five years and has a cash exercise price of $0.10 or a cashless exercise price of $0.20. The warrant had a value of $78,395, which has been charged to finance cost.

On November 4, 2022, the Company entered a convertible promissory note in the amount of $25,000. The note matures on the earlier of May 4, 2023, or 5 days after demand and bears interest at 10% per year. The note is convertible into shares of common stock at a fixed conversion price of $0.30 per share.

On September 7, 2022, the Company entered a convertible promissory note in the amount of $100,000. The note matures on September 7, 2023, and bears interest at 8% per year. The note is convertible into shares of common stock at a fixed conversion price of $0.10 per share. The company has recorded a discount of $100,000. Amortization of discount was $24,931 and $49,589 for the three and six months ended June 30, 2023.

On August 20, 2022, the Company entered a convertible promissory note in the amount of $49,850. The note matures on the earlier of February 20, 2023, or 10 days after demand and bears interest at 8% per year. The note is convertible into shares of common stock at a fixed conversion price of $0.30 per share.

On June 15, 2022, the Company entered 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, which was fully amortized in 2022.

2021 Convertible Notes

On September 20, 2021, the Company entered a convertible promissory note with GS Capital Partners, LLC with a face value of $220,000. The note matured on September 20, 2022, and bears interest at 8% per year. The note is convertible into shares of common stock at a fixed conversion price of $0.10 per share. To date, the lender has not declared a default as both Parties continue to  actively explore a mutually beneficial path forward.. A compromise was not reached as of June 30, 2023; however, the Company remains committed to addressing this matter in full with its convertible note holders and looks forward to reaching an amicable agreement which is advantageous to both Parties during the 3Q of 2023. Please see the section titled “Subsequent Events” for more information. During the six months ended June 30, 2023, an aggregate of 3,186,595 shares of common stock were issued upon the conversion of $68,250 of notes payable, $9,995 of related accrued interest, and $3,750 of fees. The value of the shares issued was $542,243, and the Company recorded a loss on conversion of $460,248.

During the fourth quarter of 2021, the Company entered twenty convertible promissory notes with various holders aggregating $1,412,000. The notes matured one year from issuance and bear interest at 8% per year. The notes are convertible into shares of common stock at a fixed conversion price of $0.10 per share. During the six months ended June 30, 2023, an aggregate of 3,360,939 shares of common stock were issued upon the conversion of $98,752 of notes payable and $3,000 of fees. The value of the shares issued was $562,682, and the Company recorded a loss on conversion of $460,930.

The Company’s convertible promissory notes at June 30, 2023 and December 31, 2022 are as follows:

Note 8. Notes Payable

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%.

GEX Management, Inc.

On August 30, 2021, the Company entered into a promissory note with GEX Management, Inc. The note matured on February 28, 2022, and 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, 2023. The shares have been valued at $120,990, which has been included in accrued expenses at June 30, 2023, and December 31, 2022. 

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 16, 2021, the U.S. Small Business Administration announced that the deferment period for the repayment would be extended an additional 12 months. The company received a past due notice dated June 6 , 2023 for $4,386 due since December 12, of 2022 due to an error on the part of the company. As of the date of filing, the company has paid this past due balance.

2023 Note

On January 27, 2023, the Company received a short-term loan of $350,000.  The loan was repaid in full on March 6, 2023. In connection with this loan, the Company agreed to issue 2,000,000 shares to the individual, valued at $196,000. As of June 30, 2023, 500,000 shares have been issued and the remaining 1,500,000 shares, valued at $147,000, are classified as Common Stock To Be Issued.

2023 Financing Agreement

In June 2023, the Company entered into a financing agreement with a face amount of $260,000. The agreement will be repaid with weekly payments of $3,753, over approximately 16 months. The agreement contained an original issue discount of $60,000 and $5,000 of fees were deducted from the proceeds. The Company received proceeds of $195,000. Additionally, the Company incurred debt costs of $22,655. Total discount and costs of $87,655 will be amortized over the life of the agreement. During the three months ended June 30, 2023, the Company amortized $5,478 of discount and costs to interest expense. The Company has granted  the lender a security interest in substantially all of its cash, accounts receivable, inventory and other assets.

The Company’s notes at June 30, 2023 and December 31, 2022 are as follows:

Note 9. Deferred Revenue

In December 2017, the Company and Zhejiang MENRED Environmental Tech Co, Ltd., Zhejiang Province, China (“Menred”), entered into a royalty bearing License and Supply Agreement (the “License and Supply Agreement”), effective December 21, 2017. Pursuant to the License and Supply Agreement, the Company licensed certain intellectual property and improvements to Menred, for use in the manufacture and sale of certain product types sold by Menred mostly for installation in buildings in China. Menred also agreed to purchase its requirements of certain products from the Company for Menred’s use, pursuant to the terms and conditions of the License and Supply Agreement. Also pursuant to the License and Supply Agreement, each year the Parties have minimum sales commitments of each other’s products. The License and Supply Agreement has a ten-year term with mutually agreed upon five-year extensions. The parties began a renegotiation of the terms and conditions of this agreement in December of 2022.

The Company recognized license revenue of $12,500 for each of the three months ended June 30, 2023 and 2022, and $25,000 for each of the six months ended June 30, 2023 and 2022. Deferred revenue for the agreement was $223,656 and $248,656 at June 30, 2023 and December 31, 2022, respectively. The Company recognized royalty revenue of $0 for the three months ended March 31, 2023, and 2022.

Note 10. 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 an 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 continue to vigorously defend itself against this Order, as well as move on all possible avenues available in order 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. The Company has engaged in regular conversation with its counsel regarding this matter.

Accounts Payable

The firms below have pursued legal action against the Company in an effort to collect overdue accounts payable sums. The Company is working with each to enter into a settlement plan, or “pay over a period of time” payment plan. To date, the Company has one agreement in place with SoftinWay, but anticipates additional agreements with the other firms in the future:

Footnotes for Accounts Payable Table

Note 11. Subsequent Events

No material events have occurred after June 30, 2023 that requires recognition or disclosure in the financial statements except as follows:

On July 5, 2023, the Company issued 315,000 shares of common stock upon the conversion of notes payable.

The Board of Directors of the Company authorized a change in Transfer Agents from ClearTrust, LLC to Transfer Online, Inc. effective at the close of business on July 7, 2023. The former transfer agent completed three requests already in progress.

On August 2, 2023, the Company received funding in the amount of $50,000 in the form of a convertible promissory note.

Between July 1, 2023 and the date of filing, the Company has repaid $22,518 of the June 2023 financing agreement discussed under Note 8. Notes Payable.

Between July 1, 2023 and the date of filing, the Company has repaid $12,000 in interest toward the Senior Secured Note.

No other material events have occurred after June 30, 2023, requiring recognition or disclosure in the financials.

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

During the COVID Pandemic awareness of the benefits of increased ventilation in homes and the workplace has emerged as a primary focus on the prevention of exposure to bacteria and viruses.   The Company is uniquely positioned as its current products are designed to provide a solution to these issues, especially with increased ventilation. Health experts continue to cite increased ventilation as a major factor to battle future outbreaks.  The ConsERV products are specifically designed to increase new, fresh, ventilated, air in our homes and workplaces. Management is developing and executing plans to increase product awareness through existing and prospective sales channels.

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 worldwide effort is attracting attention to innovative technologies which reduce carbon emissions. Management is confident of 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.

Supply Chain Management

Economies around the World are experiencing inflationary pressures which are impacting prices and availability of materials throughout the supply chain. Management is taking a more aggressive strategy to identify a diverse portfolio of suppliers to increase options for materials and parts. The supply and availability of certain components remain sporadic and limited across the supply chain. 

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 meet the material, (As verified by 3^rd 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.

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

Aqualyte^TM

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 Aqualyte^TM and we have been granted a series of patents relating to its manufacture and use.

Aqualyte^TM 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.

ConsERV^TM

Sales channels for our ConsERV product continue to expand. This energy conservation product typically saves an average of 30% on HVAC operating costs while providing increased amounts of ventilation air. The economic savings typically allow the remainder of the system to be smaller (less expensive) and/or achieve the same results from a reduced run time, 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 preconditions the incoming air by removing some of the heat and humidity and transfers it to the exhaust air stream, saving energy. For winter heating, the core recovers a portion of the heat and humidity in the exhaust air and transfers it to the incoming air to reduce heating requirements.

When compared to similar competitive products, and 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 for energy recovery ventilation equipment is changing as the technology is 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.

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 experience with the ERV market. The line was certified by the needed outside agencies and initial market introduction began in the 4^th 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 that the product will continue to be well received in the market. Sales of existing cores and customer systems are expected to continue generating revenue 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. Engineering efforts continue to optimize the N Series design for both manufacturing and customer usage.

The Company has increased its product offerings by selling and delivering custom-engineered systems in addition to the N Series. These products are constructed from an aluminum frame-and-panel system that allows ready modification and configuration to match customer requirements, making them well-suited to large projects with a relatively customized HVAC plant. These designs are evolutions of the D, J, and Z Series systems the Company sold prior to 2013, allowing them to be introduced to the market relatively quickly.

DisruptorCC^TM

The Company is prepared to begin ‘soft-selling’ a new HVAC product (based around the Aqualyte membrane) as another member of the company’s HVAC group called NanoAir™. This moisture management system increases or decreases the humidity of the process air as commanded to enable precise control of conditions without requiring traditional systems such as steam boilers. The initial sale of this product will be shipped to a large multinational company in the HVAC industry using it on one of their own facilities to maintain a narrow humidity range needed for precise manufacturing operations. The DisruptorCC expands the Dais product line into new within the HVAC market.

Product Summary

Dais’s advanced material has many demonstrated uses. Management is positioning most of the Company’s resources behind ConsERV, and is working to grow revenues 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. 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.

Increased sales activities for advanced materials are focused on targeted companies within key industries worldwide, taking 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.

Results of Operations

Three Months Ended June 30, 2023 Compared to June 30, 2022

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

Revenue

We generate our revenues primarily from the sale of our ConsERV cores and systems and Aqualyte membrane. Product sales were $347,558 and $117,699 for the three months ended June 30, 2023, and 2022, respectively, an increase of $229,859 or 195%. The increase in revenue was driven by an increase in ConsERV core and system sales. We are focusing on creating sustainable revenues with Aqualyte and ConsERV core and system sales with the expectation that this will continue to allow for growth in 2023 and beyond.

Revenues from royalty and license fees were $12,500 and $12,500 for the three months ended June 30, 2023, and 2022, 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 $284,171 and $177,205 for the three months ended June 30, 2023 and 2022 respectively, an increase of $106,966 or 60%. This increase in cost of goods sold reflects our increased product sales.

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

Gross margin

Gross margin from the sales of products was $75,887 and gross loss was $47,006 for the three months ended June 30, 2023, and 2022 respectively, representing 21% and negative 36% for the three months ended June 30, 2023, and 2022.

We believe there are continuing issues relating to the cost of components and related shipping as supply-chain related challenges force changes in pricing of certain components.  We continue to address these issues by closely tracking production costs and adjusting the prices for our ConsERV product line while continuing to work within our supply chain to reduce these costs.

Research and development costs

Expenditures for research and development are expensed as incurred. We incurred research and development costs of $98,624 and $61,748 for the three months ended June 30, 2023, and 2022, an increase of $36,876 or 60%. 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 $0 for the three months ended June 30, 2023, and 2022,

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 $425,637 and $403,349 for the three months ended June 30, 2023 and 2022, an increase of $22,288 or 6%. This difference is due to normal fluctuations in operating costs.

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

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, 2023, and 2022, was $518,646 and $707,896, a decrease of $189,250 or 27%. The decreased net other expense is primarily due to debt issue costs amortized in the second quarter of 2022 offset by an increase in note conversions in the second quarter of 2023.

Net Income (Loss)

Net loss was $967,020 and $1,219,999 for the three months ended June 30, 2023, and 2022. The decreased loss in the three months ended June 30, 2023 was primarily due to the decrease in other expenses described above and the Company’s increased gross margin.

Six Months Ended June 30, 2023 Compared to June 30, 2022

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

Revenue

We generate our revenues primarily from the sale of our ConsERV cores and systems and Aqualyte membrane. Product sales were $636,115 and $160,894 for the six months ended June 30, 2023, and 2022, respectively, an increase of $475,221 or 295%. The increase in revenue was driven by an increase in ConsERV core and system sales. We are focusing on creating sustainable revenues with Aqualyte and ConsERV core and system sales with the expectation that this will continue to allow for growth in 2023 and beyond.

Revenues from royalty and license fees were $25,000 and $25,000 for the six months ended June 30, 2023 and 2022, 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 $553,514 and $229,645 for the six months ended June 30, 2023 and 2022 respectively, an increase of $323,869 or 141%. This increase in cost of goods sold reflects our increased product sales.

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

Gross margin

Gross margin from the sales of products was $107,601 and gross loss was $43,751 for the six months ended June 30, 2023, and 2022 respectively, representing 16% and negative 24% for the six months ended June 30, 2023, and 2022.

We believe there are continuing issues relating to the cost of components and related shipping as supply-chain related challenges force changes in pricing of certain components.  We continue to address these issues by closely tracking production costs and adjusting the prices for our ConsERV product line while continuing to work within our supply chain to reduce these costs.

Research and development costs

Expenditures for research and development are expensed as incurred. We incurred research and development costs of $232,759 and $126,621 for the six months ended June 30, 2023, and 2022, an increase of $106,138 or 84%. 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 $0 for the six months ended June 30, 2023 ,and 2022,

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 $805,037 and $828,625 for the six months ended June 30, 2023 and 2022, a decrease of $23,588 or 3%. This difference is due to normal fluctuations in operating costs.

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

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, 2023 and 2022 was $2,040,927 and $1,303,532, an increase of $737,395 or 57%. The increased net other expense is primarily due to note conversions in the first and second quarter of 2023.

Net Income (Loss)

Net loss was $2,971,122 and $2,302,529 for the six months ended June 30, 2023 and 2022. The increased loss in the six months ended June 30, 2023 was primarily due to the increase in other expenses described above.

Liquidity and Capital Resources

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2023, the Company generated a net loss of $2,971,122 and has incurred significant losses since inception. As of June 30, 2023, the Company has an accumulated deficit of $65,245,787, total stockholders’ deficit of $13,730,890, negative working capital of $13,730,351 and cash and cash equivalents of $37,055. The Company used $1,158,656 and $991,845 of cash for operations during the six months ended June 30, 2023, and 2022, 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:

Management believes:

We believe the Company’s prospects to secure growth funding remain good. On a macro level we believe the world-wide market for the equipment type the Company is selling (and developing) has changed for the positive in the last two years reflecting end user awareness of the need to address Climate Change related issues faster, and the changes in buying habits forged by the world-wide pandemic. On more of a micro level the company has shown solid progress over the last three quarters, removed a serious impediment to growth by completing a ‘debt to equity’ program where the convertible noteholders debt positions were converted into equity (common stock and warrants). The company introduced a popular new line of our ConsERV equipment having improved performance and pricing to a growing independent sales channel through-out North America. We reached agreement (now moving to contract stage) in late 4Q 2022 between the company and its Senior Secured Note Holder (having deep rights with the assets of the Company which are pledged as security for repayment of the Note). The company is continuing to develop the basis of a long-term business relationship with a well-known, multi-national corporation interested in using the Company’s HVAC and water products for its own and third-party use.

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

Statement of Cash Flows

Cash as of June 30, 2023, was $37,055 compared to $27,412 as of December 31, 2022. Cash is primarily used to fund our working capital requirements.

Net cash used in operating activities was $1,158,656 for the six months ended June 30, 2023 compared to $991,845 for the same period in 2022. The increase in net cash used was due to an increase in net loss (after adjusting for non-cash items) and a decrease in cash from net working capital accounts. For the six months ended June 30, 2023, net loss (after adjusting for non-cash items) was $1,543,921. Accounts receivable, inventory and other assets together increased by $113,752. Accounts payable, accrued liabilities, customer deposits and deferred revenue increased in total by $499,017. 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.

Net cash used in investing activities was $4,894 for the six months ended June 30, 2023 compared to $37,428 for the same period in 2022, driven by a decrease in patent costs and purchases of equipment in 2023.

Net cash provided by financing activities was $1,173,193 for the six months ended June 30, 2023 compared to $300,000 for the same period in 2022. The increase is due to proceeds from 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.

Small Business Administration Loan