Notes
to the Condensed Consolidated Financial Statements
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Applied
UV, Inc. (the "Parent") was formed and incorporated in the State of Delaware for the intended purpose of holding the equity of
SteriLumen, Inc. (“SteriLumen”), MunnWorks, LLC (“MunnWorks” and together with SteriLumen, the “Subsidiaries”)
and other companies acquired or created by the Parent in the future. The Parent acquired the Subsidiaries pursuant to three share exchanges
whereby the equity holders of the Subsidiaries exchanged all of their equity interests in the Subsidiaries for shares of voting stock
of the Parent. As a result of the share exchanges, each Subsidiary became a wholly-owned subsidiary of the Parent. The Parent and each
Subsidiary are collectively referred to herein as (the "Company").
SteriLumen
is engaged in the design, manufacture, assembly and distribution of (i) automated disinfecting mirror systems for use in hospitals and
other healthcare facilities and (ii) air purification and pathogen elimination systems through its purchase of substantially all of the
assets and certain liabilities of Akida Holdings, LLC, KES Science & Technology, and Scientific Air Management LLC, as described
below. MunnWorks, LLC is engaged in the manufacture of fine mirrors and custom furniture specifically for the hospitality and retail
industries.
On
March 25, 2022, the Company acquired the assets and assumed certain liabilities of VisionMark, LLC, ("VisionMark"). VisionMark
is engaged in the business of manufacturing furniture using wood and metal components for the hospitality and retail industries.
On
January 26, 2023 we closed on the merger agreement with PURO Lighting LLC and LED Supply Co. LLC along with its operating subsidiaries
(“PURO merger”). PURO and LED Supply Co. own a powerful suite of products used in education, government, and healthcare that
incorporates UV Lighting and a HVAC monitoring software platform; LED Supply Co. provides design, distribution, and implementation services
for lighting, controls and smart building technologies.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Applied UV, Inc., MunnWorks, LLC and SteriLumen, Inc. All significant intercompany
transactions and balances are eliminated in consolidation.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the
rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The
unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are
not necessarily indicative of the results for the full fiscal year. These financial statements should be read along with the Annual Report
filed of the Company for the annual period ended December 31, 2022. The consolidated balance sheet as of December 31, 2022 was derived
from the audited consolidated financial statements as of and for the year then ended.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration
of Credit and Business Risk
At
times throughout the year, the Company maintains cash balances at various institutions, which may exceed the Federal Deposit Insurance
Corporation limit. As of March 31, 2023, the Company was approximately $1,760,000
in excess of FDIC insured limits. The Company
provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances
for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends and other information.
For
the three months ended March 31, 2023 and 2022, the Company had no major suppliers that accounted for over 10% of supplies and materials
used by the Company.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates include the valuation and accounting for equity awards related to warrants and stock-based compensation,
determination of fair value for derivative instruments, the accounting for business combinations and allocating purchase price and estimating
the useful life of intangible assets.
Cash,
Restricted Cash and Cash Equivalents
Cash
and equivalents include highly liquid investments that have original maturities less than 90 days at the time of their purchase. These
investments are carried at cost, which approximates market value because of their short maturities. As of March 31, 2023 and December
31, 2022, the Company had approximately $27,000,
respectively, in cash equivalents.
Accounts
receivable
The
Company’s accounts receivable balance consists of amounts due from its customers. The Company records accounts receivable at the
invoiced amount less an allowance for any potentially uncollectable accounts under the current expected credit loss (“CECL”)
impairment model and presents the net amount of the financial instrument expected to be collected. The CECL impairment model requires
an estimate of expected credit losses, measured over the contractual life of an instrument, which considers forecasts of future economic
conditions in addition to information about past events and current conditions. Based on this model, the Company considers many factors,
including the age of the balance, collection history, and current economic trends. Bad debts are written off after all collection efforts
have ceased. Allowances for credit losses are recorded as a direct reduction from an asset’s amortized cost basis. Credit losses
and recoveries are recorded in selling, general and administrative expenses in the consolidated statements of operations. Recoveries
of financial assets previously written off are recorded when received. For the three months ended March 31, 2023 and 2022, the Company
had credit losses (recoveries) of $ (93,562)
and $48,151,
respectively. Based on the Company’s current and historical collection experience, the Company recorded an allowance for doubtful
accounts of $118,000 and
$35,000 as
of March 31, 2023 and December 31, 2022, respectively.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventories
consist of raw materials, work-in-process, and finished goods. Raw materials and finished goods are valued at the lower of cost or net
realizable value, using the first-in, first-out (“FIFO”) valuation method. Work-in-process and finished goods includes the
cost of materials, freight and duty, direct labor and overhead. The Company writes down inventory for estimated obsolescence equal to
the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
The company had a reserve for inventory approximating $187,000
and $88,000
as of March 31, 2023 and December 31, 2022, respectively.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation of furniture and fixtures is provided using the straight-line method, generally over
the terms of the lease. Repairs and maintenance expenditures, which do not extend the useful lives of the related assets, are expensed
as incurred. Depreciation of machinery and equipment is based on the estimated useful lives of the assets.
| Schedule
of estimated useful lives | |
|
| Machinery
and equipment | |
5
to 7 years |
| Leasehold
improvements | |
Lesser
of term of lease or useful life |
| Furniture
and fixtures | |
5
to 7 years |
Business
Acquisition Accounting
The
Company applies the acquisition method of accounting for those that meet the criteria of a business combination. The Company allocates
the purchase price of its business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference
between the total cost of the acquisition and the sum of the fair values of acquired tangible and identifiable intangible assets less
liabilities is recorded as goodwill. Transaction costs are expensed as incurred in general and administrative expenses.
Goodwill
and Intangible Assets
The
Company has recorded intangible assets, including goodwill, in connection with business combinations. Estimated useful lives of amortizable
intangible assets are determined by management based on an assessment of the period over which the asset is expected to contribute to
future cash flows.
In
accordance with U.S. GAAP for goodwill and other indefinite-lived intangibles, the Company tests these assets for impairment annually
and whenever events or circumstances make it more likely than not that impairment may have occurred. For the purposes of that assessment,
the Company has determined to assign assets acquired in business combinations to a single reporting unit including all goodwill and indefinite-lived
intangible assets acquired in business combinations.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
Income
Taxes
The
Company files income tax returns using the cash basis of accounting. Income taxes are accounted for under the asset and liability method.
Current income taxes are based on the year's income taxable for federal and state tax
reporting
purposes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income. The carrying amount of deferred tax assets is reviewed
at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow
all or part of the asset to be recovered.
Derivative
Instruments
The
Company evaluates its warrants to determine if those contracts or embedded components of those contracts qualify as derivatives. The
result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and
recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements
of operations as other income or expense.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. The Company has concluded that there are no such reclassifications required to be made as of and
for the periods ended March 31, 2023 and December 31, 2022.
The
Company utilizes the Black-Scholes valuation model to value the derivative warrants as stipulated in the agreement for the warrant holders
to receive cash based on that value.
Fair
Value of Financial Instruments
The
carrying amounts reported in the unaudited condensed consolidated balance sheets for loans payable approximate fair value because of
the immediate or short-term maturity of the financial instruments. The Company's financial assets and liabilities are measured using
inputs from the three levels of the fair value hierarchy.
Loss
Per Share
Basic
loss per share is computed by dividing net loss attributable to common shareholders (the numerator) by the weighted-average number of
common shares outstanding (the denominator) for the period. In periods of losses, diluted loss per share is computed on the same basis
as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.
The
following table sets forth the number of potential shares of common stock that have been excluded from diluted net loss per share because
their effect was anti-dilutive:
Schedule
of Anti-dilutive Securities Excluded from Computation of Loss Per Share:
| Schedule
of anti dilutive securities excluded from computation of earnings per share | |
| | | |
| | |
| | |
As
of March 31, |
| | |
2023 | |
2022 |
| Common
stock options | |
| 1,301,195 | | |
| 833,314 | |
| Series
B Preferred Stock | |
| 1,250,000 | | |
| — | |
| Series
C Preferred Stock | |
| 399,996 | | |
| — | |
| Common
stock warrants | |
| 192,419 | | |
| 192,419 | |
| Total | |
| 3,143,610 | | |
| 1,025,733 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based
Compensation
The
Company accounts for its stock-based compensation awards in accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification Topic 718 ("ASC"), Compensation-Stock Compensation ("ASC 718"). ASC 718 requires all stock-based
payments to employees, including grants of employee stock options and restricted stock and modifications to existing stock options, to
be recognized in the statements of operations based on their fair values over the requisite service period.
Research
and Development
The
Company accounts for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and
Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred.
Accordingly, research and development costs are expensed as incurred.
Revenue
Recognition
The
Company recognizes revenue when the performance obligations in the client contract has been achieved. A performance obligation is a contractual
promise to transfer product to the customer. The transaction price of a contract is allocated to each distinct performance obligation
and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Under ASC 606, revenue is recognized
when a customer obtains control of goods in an amount that reflects the consideration the Company expects to receive in exchange for
those goods. To achieve this core principle, the Company applies the following five steps:
| 1) | Identify
the contract with a customer. |
| 2) | Identify
the performance obligations in the contract. |
| 3) | Determine
the transaction price. |
| 4) | Allocate
the transaction price to performance obligations in the contract. |
| 5) | Recognize
revenue when or as the Company satisfies a performance obligation. |
MunnWorks
projects, including those from the VisionMark acquisition, are completed within the Company’s facilities. For these projects, the
company designs, manufactures and sells custom mirrors and furniture for the hospitality and retail industries through contractual agreements.
These sales require the company to deliver the products within three to nine months from commencement of order acceptance. Revenue is
recognized using the input method of accounting. Deferred revenue represents amounts billed in excess of revenues recognized. Revenues
recognized in excess of amounts billed typically does not occur as the Company will not perform any work in excess of the amount the
company bills to its customers. If work is performed in excess of amounts billed, the Company will record an unbilled receivable.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition (Continued)
The
company applied the five-step model to the sales of PURO's disinfection solution, LED's lighting products, Akida’s and KES’s
Airocide™ and misting system products, and SciAir’s whole-room aerosol chamber and laboratory certified air disinfection
machines. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses the goods
or services promised within each contract and determines those that are performance obligations and assesses whether each promised good
or service is distinct. The Company sells Airocide™ air sterilization units, misting systems, and whole-room aerosol chamber and
laboratory certified disinfection machines to both consumer and commercial customers. These products are sold both domestically and internationally.
The cycle from contract inception to shipment of products is typically one day to three months. The Company’s contracts for both
its consumer and commercial customers each contain a single performance obligation (delivery of Airocide™, KES, and SciAir products),
as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and,
therefore, not distinct. As a result, the entire transaction price is allocated to this single performance obligation. The Company recognizes
revenues at a point in time when the customer obtains control of the Company’s product, which typically occurs upon shipment of
the product by the Company or upon customer pick-up via third party common carrier.
Revenue
recognized over time and revenue recognized at a point in time for the three months ended:
Schedule
of revenue:
| Schedule
of revenue | |
| | | |
| | |
| | |
March
31, |
| | |
2023 | |
2022 |
| Recognized
over time | |
$ | 5,286,443 | | |
$ | 529,237 | |
| Recognized
at a point in time | |
| 5,368,040 | | |
| 2,826,853 | |
| | |
$ | 10,654,483 | | |
$ | 3,356,090 | |
Deferred
revenue was comprised of the following as of:
| | |
March
31, | |
December
31, |
| | |
2023 | |
2022 |
| Recognized
over time | |
$ | 2,661,199 | | |
$ | 3,581,195 | |
| Recognized
at a point in time | |
| 3,894,297 | | |
| 1,149,104 | |
| | |
$ | 6,555,496 | | |
$ | 4,730,299 | |
The
Company recognized $2,702,034 of
deferred revenue as of December 31, 2022 as revenue during the three months ended March 31, 2023.
Advertising
Advertising
costs consist primarily of online search advertising and placement, trade shows, advertising fees, and other promotional expenses. Advertising
costs are expensed as incurred and are included in sales and marketing on the consolidated statements of operations. Advertising expense
for the three months ended March 31, 2023 and 2022 was $151,618
and $197,995,
respectively.
Vendor
deposits
Vendor
payments to third manufactures are capitalized until completion of the project and are recorded as vendor deposits. As of March 31, 2023
and December 31, 2022, the vendor deposit balance was $1,313,244
and $75,548,
respectively.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Patent
Costs
The
Company capitalizes costs consisting principally of outside legal costs and filing fees related to obtaining and maintaining patents.
The Company amortizes patent costs over the useful life of the patent which is typically 20 years, beginning with the date the patent
is filed with the U.S. Patent and Trademark Office, or foreign equivalent. As of March 31, 2023 and December 31, 2022, capitalized patent
costs net of accumulated amortization was $1,568,725
and $1,593,741,
respectively. For the three months ended March 31, 2023 and 2022, the Company recorded $41,495
and $25,016,
respectively, of amortization expense for these patents.
Recently
adopted accounting standards:
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the
specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have
a material impact on the Company’s financial position or results of operations upon adoption.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January
1, 2023. These standards replace the existing incurred loss impairment model with an expected credit loss model and requires a financial
asset measure at amortized cost to be presented at the net amount expected to be collected. The Company determined that this change does
not have a material impact to the financial statements or financial statement disclosures.
Recently
issued accounting pronouncements:
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06,
Debt—Debt with Conversion and Other Options (Subtopic 470 20) and Derivatives and Hedging—Contracts in Entity’s Own
Equity (Subtopic 815 40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates
the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies
the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard
also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s
own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if converted method for
all convertible instruments. The amendments in this update will be effective for the Company on January 1, 2024 and may be early adopted
at the beginning of fiscal year 2023. The Company is currently assessing the impact, if any, that ASU 2020-06 would have on its financial
position, results of operations or cash flows.
NOTE
2 – BUSINESS ACQUISITION
The
Company accounted for the acquisitions as a business combinations using the purchase method of accounting as prescribed in Accounting
Standards Codification 805, Business Combinations (“ASC 805”) and ASC 820 – Fair Value Measurements and Disclosures
(“ASC 820”). In accordance with ASC 805 and ASC 820, the Company used its best estimates and assumptions to accurately assign
fair value to the tangible assets acquired, identifiable intangible assets and liabilities assumed as of the acquisition dates. Goodwill
as of the acquisition date is measured as the excess of purchase consideration over the fair value of tangible and identifiable intangible
assets acquired and liabilities assumed. The results of operations of the acquired businesses since the date of acquisition are included
in the consolidated financial statements of the Company for the three months ended March 31, 2023 and 2022. The total purchase consideration
was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined
by management. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded
as goodwill. The value of the goodwill from the acquisitions described below can be attributed to a number of business factors including,
but not limited to, cost synergies expected to be realized and a trained technical workforce.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
2 – BUSINESS ACQUISITION (CONTINUED)
In
conjunction with acquisitions noted below, we used various valuation techniques to determine fair value of the assets acquired, with
the primary techniques being discounted cash flow analysis, relief-from-royalty, a form of the multi-period excess earnings and the with-and-without
valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Inputs to
these valuation approaches require significant judgment including: (i) forecasted sales, growth rates and customer attrition rates, (ii)
forecasted operating margins, (iii) royalty rates and discount rates used to present value future cash flows, (iv) the amount of synergies
expected from the acquisition, (v) the economic useful life of assets and (vi) the evaluation of historical tax positions. In certain
acquisitions, historical data is limited, therefore, we base our estimates and assumptions on budgets, business plans, economic projections,
anticipated future cash flows and marketplace data.
In
relation with the purchase by SteriLumen, Inc., of Old SAM Partners, LLC, on March 31, 2022, there was a settlement of a dispute that
arose during the first quarter of 2022 between both parties regarding certain representations and warranties in the purchase agreement
which resulted in a settlement and mutual release agreement where the seller agreed to relinquish any right, title, and interest in the
previously issued 400,000 shares.
During the three months ended March 31, 2022, the company recorded a loss on change in fair market value of contingent consideration
of $240,000 and,
as a result of the settlement agreement, the company recorded a gain on settlement of contingent consideration of $1,700,000.
The Company also determined that a triggering event had occurred as a result of the settlement agreement. A quantitative impairment test
on the goodwill and intangible assets determined that the fair value was below the carrying value and as a result the Company recorded
a full goodwill impairment charge of $1,138,203
in the first quarter of 2022.
On
March 25, 2022, the Company entered into an asset purchase agreement by and among the Company, MunnWorks, LLC., a New York Limited Liability
Company and wholly-owned subsidiary of the Company (the “Purchaser”) and VisionMark LLC, a New York limited liability company
(the “Seller”), pursuant to which the Purchaser acquired substantially all of the assets of the Seller in exchange for the
assumption of obligations of buyer under the sublease and sublease guarantee.
The
purchase price and purchase price allocation as of the acquisition completion date follows.
| Schedule
of recognized identified assets acquired and liabilities assumed | |
| | |
| Purchase
Price: | |
|
| Cash
paid at closing | |
$ | 10 | |
| Due
to landlord | |
| 755,906 | |
| Total
Purchase Price, net of cash acquired | |
| 755,916 | |
| | |
| | |
| Assets
Acquired: | |
| | |
| Accounts
receivable, net | |
| 636,550 | |
| Inventory | |
| 176,583 | |
| Costs
and estimated earnings in excess of billings | |
| 181,152 | |
| Machinery
and equipment | |
| 1,100,000 | |
| Total
Assets Acquired: | |
| 2,094,285 | |
| | |
| | |
| Liabilities
Assumed: | |
| | |
| Billings
in excess of costs and earnings on uncompleted contracts | |
| (1,388,838 | ) |
| Net
Assets Acquired | |
| 705,447 | |
| Excess
Purchase Price "Goodwill" | |
$ | 50,469 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
2 – BUSINESS ACQUISITION (CONTINUED)
The
excess purchase price has been recorded as goodwill in the amount of approximately $50,469.
The goodwill is amortizable for tax purposes.
In
connection with the VisionMark LLC acquisition, the Company is obligated to repay $31,057
of past due lease payments per month for the
next 36 months commencing on April 1, 2022. The Company recognized a discount and related liability equal to the present value of the
past due lease liability, and amortizes the difference between such present value and the liability through interest expense using a
rate of 38.7%
as per the effective interest rate method over the repayment period. Amortization of discount included in interest expenses was $40,797
and $0
for the three months ended March 31, 2023 and
2022, respectively.
As
of March 31, 2023, the future maturity of the lease liability is as follows:
| Schedule
of future maturity of the lease liability | |
| | |
| Years
Ended December 31, | |
|
| 2023
(9 months) | |
$ | 279,512 | |
| 2024 | |
| 372,684 | |
| 2025 | |
| 93,174 | |
| Total | |
| 745,370 | |
| Less:
Unamortized discount | |
| (175,281 | ) |
| Total
amount due to landlord | |
| 570,089 | |
| Less:
current portion of amount due to landlord, net of discount | |
| (244,532 | ) |
| Total
long-term portion of amount due to landlord | |
$ | 325,557 | |
On
January 26, 2023, the Company entered into an asset purchase agreement by the Company (the "Buyer") and PURO Lighting, LLC, (the
"Seller") a limited liability company under the laws of the State of Colorado, pursuant to which the Purchaser acquired substantially
all of the assets of the Seller in exchange for cash, common stock and preferred stock of the buyer. The Company paid or issued, as applicable
(i)
2,497,220 shares of the Company’s common stock, (ii) 251,108 shares of the Company’s 5% Series C Cumulative Perpetual Preferred
Stock, par value $0.0001 per share (“Series C Preferred Stock”), (iii) cash of $3,828,702 and, (iv) 1,250,000 shares of the
Company’s 2% Series B Cumulative Perpetual Preferred Stock (the “Series B Preferred Stock”). In addition, the seller
has the right to receive earnout payments subject to certain conditions, including achieving certain revenue targets and gross profit
margins and payable as set forth in the PURO Merger Agreement.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
2 – BUSINESS ACQUISITION (CONTINUED)
The
purchase price and purchase price allocation as of the acquisition completion date follows.
| Schedule
of recognized identified assets acquired and liabilities assumed | |
| | |
| Purchase
Price: | |
|
| Cash
paid at closing, net of cash acquired | |
$ | 3,828,972 | |
| Common
stock | |
| 2,597,111 | |
| Series
B Preferred Stock | |
| 3,712,500 | |
| Series
C Preferred Stock | |
| 667,947 | |
| Contingent
consideration-Make Whole*** | |
| 2,397,329 | |
| Contingent
consideration-Earnout | |
| 4,046,232 | |
| Total
Purchase Price, net of cash acquired | |
| 17,250,091 | |
| | |
| | |
| Assets
Acquired: | |
| | |
| Accounts
receivable, net | |
| 274,574 | |
| Inventory | |
| 2,085,912 | |
| Other
current assets | |
| 415,188 | |
| Fixed
assets, net | |
| 5,075 | |
| Tradenames/trademarks | |
| 1,228,000 | |
| Technology/know-how/trade
secrets | |
| 1,842,000 | |
| Patented
technology | |
| 1,710,000 | |
| Customer
relationships | |
| 4,705,000 | |
| Total
Assets Acquired: | |
| 12,265,749 | |
| | |
| | |
| Liabilities
Assumed: | |
| | |
| Accounts
payable | |
| (936,448 | ) |
| Deferred
revenue | |
| (18,482 | ) |
| Total
Liabilities Assumed | |
| (954,930 | ) |
| Net
Assets Acquired | |
| 11,310,819 | |
| Excess
Purchase Price "Goodwill" | |
$ | 5,939,272 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
2 – BUSINESS ACQUISITION (CONTINUED)
***Represents
the difference in fair value of common stock on the date
of acquisition versus agreed upon $2 per share ("Make Whole"). In the event any PURO Equityholder sells any shares of Common
Stock obtained pursuant to the terms of the Agreement through a registered broker/dealer on or after the first anniversary of the Closing
Date for a price per share of the Common Stock less than $2.00 (the “Sale Price”), Parent will pay to such PURO Equityholder
within ten (10) Business Days following the consummation of such sale to an account designated in writing by such PURO Equityholder an
amount equal to (a) (i) $2.00 less (ii) the Sale Price, multiplied by (b) the number of shares of Common Stock sold in such sale (the
“Make Whole Amount”). The Make Whole Amount payment shall be 50% in cash and 50% in shares of Common Stock (with the number
of shares of Common Stock to be issued determined based on a price per share equal to 90% of the Sale Price). As a result of the make-whole
provision, the liability was increased to $2,796,889 as of March 31, 2023 with the change in fair market value of $399,555 being recorded
to other expense within the consolidated statements of operations.
The
excess purchase price has been recorded as goodwill in the amount of approximately $5,603,818.
The goodwill is amortizable for tax purposes.
On
January 26, 2023, the Company also entered into an asset purchase agreement by the Company (the "Buyer") and LED Supply Co, LLC,
(the “Seller”), a limited liability company under the laws of the State of Colorado, pursuant to which the Purchaser acquired
substantially all of the assets of the Seller in exchange for cash, common stock and preferred stocks of the buyer. The Company paid
or issued, as applicable (i)
1,377,777 shares of the Company’s common stock; (ii) 148,888 shares of Series C Preferred Stock; and (iii) cash of $286,742. In
addition, the seller has the right to receive earnout payments subject to certain conditions, including achieving certain revenue targets
and gross profit margins and payable as set forth in the LED Merger Agreement.
The
purchase price and purchase price allocation as of the acquisition completion date follows.
| Schedule
of recognized identified assets acquired and liabilities assumed | |
| | |
| Purchase
Price: | |
|
| Cash
paid at closing, net of cash acquired | |
$ | 286,742 | |
| Common
stock | |
| 1,432,889 | |
| Series
C Preferred Stock | |
| 396,042 | |
| Contingent
considerations - Make Whole*** | |
| 1,322,665 | |
| Contingent
considerations - Earnout | |
| 10,609,442 | |
| Total
Purchase Price, net of cash acquired | |
| 14,047,780 | |
| | |
| | |
| Assets
Acquired: | |
| | |
| Accounts
receivable, net | |
| 1,461,461 | |
| Inventory | |
| 1,925,285 | |
| Other
current assets | |
| 232,095 | |
| Vendor
deposits | |
| 375,672 | |
| Costs
and estimated earnings in excess of billings | |
| 533,638 | |
| Fixed
assets, net | |
| 106,330 | |
| Tradenames/trademarks | |
| 1,806,000 | |
| Technology/know-how/trade
secrets | |
| 1,169,193 | |
| Vendor
relationships | |
| 1,416,000 | |
| Rebate
program | |
| 1,894,703 | |
| Customer
relationships | |
| 2,088,000 | |
| Other
non-current assets | |
| 24,819 | |
| Total
Assets Acquired: | |
| 13,033,196 | |
| | |
| | |
| Liabilities
Assumed: | |
| | |
| Accounts
payable and accrued expenses | |
| (2,854,509 | ) |
| Deferred
revenue | |
| (2,279,616 | ) |
| Notes
payable | |
| (1,973,946 | ) |
| Financing
lease liability | |
| (25,231 | ) |
| Total
Liabilities Assumed | |
| (7,133,302 | ) |
| Net
Assets Acquired | |
| 5,899,894 | |
| Excess
Purchase Price "Goodwill" | |
$ | 8,147,886 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
2 – BUSINESS ACQUISITION (CONTINUED)
***The
amount represents the difference in fair value of common stock on the date
of acquisition versus the agreed upon $2 per share ("Make Whole"). In the event any LED Equityholder sells any shares of Common
Stock obtained pursuant to the terms of the Agreement through a registered broker/dealer on or after the first anniversary of the Closing
Date for a price per share of the Common Stock less than $2.00 (the “Sale Price”), Parent will pay to such LED Equityholder
within ten (10) Business Days following the consummation of such sale to an account designated in writing by such LED Equityholder an
amount equal to (a) (i) $2.00 less (ii) the Sale Price, multiplied by (b) the number of shares of Common Stock sold in such sale (the
“Make Whole Amount”). The Make Whole Amount payment shall be 50% in cash and 50% in shares of Common Stock (with the number
of shares of Common Stock to be issued determined based on a price per share equal to 90% of the Sale Price). As a result of the make-whole
provision, the liability was increased to $1,543,110 as of March 31, 2023 with the change in fair market value of $220,444 being recorded
to other expense within the consolidated statements of operations.
The
excess purchase price has been recorded as goodwill in the amount of approximately $7,622,091.
The goodwill is amortizable for tax purposes.
NOTE
3 – INVENTORY
Inventory
consists of the following as of:
| Schedule
of Inventory | |
| | | |
| | |
| | |
March
31, | |
December
31, |
| | |
2023 | |
2022 |
| Raw
materials | |
$ | 3,348,225 | | |
$ | 3,485,040 | |
| Finished
goods | |
| 5,448,108 | | |
| 2,110,838 | |
| Inventory
at cost | |
| 8,796,333 | | |
| 5,595,878 | |
| Less:
Reserve | |
| (186,839 | ) | |
| (87,792 | ) |
| Inventory | |
$ | 8,609,494 | | |
$ | 5,508,086 | |
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment (including machinery and equipment under capital leases) are summarized by major classifications as follows:
| Schedule
of property and equipment | |
| | | |
| | |
| | |
March
31, | |
December
31, |
| | |
2023 | |
2022 |
| Machinery
and Equipment | |
$ | 1,319,974 | | |
$ | 1,266,189 | |
| Leasehold
improvements | |
| 130,058 | | |
| 67,549 | |
| Furniture
and Fixtures | |
| 274,326 | | |
| 203,256 | |
| | |
| 1,724,358 | | |
| 1,536,994 | |
| Less:
Accumulated Depreciation | |
| (480,558 | ) | |
| (403,526 | ) |
| | |
$ | 1,243,800 | | |
$ | 1,133,468 | |
Depreciation
expense, including amortization of assets under Financing leases, for the three months ended March 31, 2023 and 2022 was $77,303
and $25,762,
respectively.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
5 – INTANGIBLE ASSETS
Intangible
assets as of March 31, 2023 and December 31, 2022 consist of the following:
| Schedule
of Intangible Assets | |
| | | |
| | |
| | |
March
31, | |
December
31, |
| | |
2023 | |
2022 |
| Intangible
assets subject to amortization | |
| | | |
| | |
| Customer
Relationships | |
$ | 8,448,598 | | |
$ | 1,655,598 | |
| Tradenames/trademarks | |
| 5,242,530 | | |
| 2,208,530 | |
| Patented
technology | |
| 3,440,771 | | |
| 1,730,771 | |
| Technology/know-how/trade
secrets | |
| 11,352,193 | | |
| 8,341,000 | |
| Vendor
relationships | |
| 1,416,000 | | |
| — | |
| Rebate
program | |
| 1,894,703 | | |
| — | |
| | |
| 31,794,795 | | |
| 13,935,899 | |
| Less:
Accumulated Amortization | |
| (3,164,942 | ) | |
| (2,581,469 | ) |
| | |
$ | 28,629,853 | | |
$ | 11,354,430 | |
During
the three months ended March 31, 2023 and 2022, the Company recorded total amortization expense related to intangible assets of
$583,473 and
$441,984,
respectively. The useful lives of tradenames ranges from 5 to 10 years, technology is 10 years, customer relationships ranges from 7
to 14 years, and patents range from 17 to 20 years.
Future
amortization of intangible assets are as follows:
| Future
amortization of intangible assets | | |
| | |
| For
the year ending December 31, | |
|
| 2023
(9 months) | | |
$ | 2,102,916 | |
| 2024 | | |
| 3,044,016 | |
| 2025 | | |
| 3,044,016 | |
| 2026 | | |
| 3,029,260 | |
| Thereafter | | |
| 17,409,645 | |
| Total | | |
$ | 28,629,853 | |
NOTE
6 – FINANCING LEASE OBLIGATION
The
Company's future minimum principal and interest payments under a financing lease for machinery and equipment are as follows:
| Schedule
of future minimum principal and interest payments under capital lease arrangements | |
| | |
| 2023
(9 months) | |
$ | 47,949 | |
| 2024 | |
| 54,901 | |
| 2025 | |
| 54,901 | |
| 2026 | |
| 49,260 | |
| 2027 | |
| 36,109 | |
| Total
lease payments | |
| 243,120 | |
| Less:
Amount representing interest | |
| (34,641 | ) |
| Present
value of future minimum lease payments | |
| 208,479 | |
| Less:
current portion | |
| (47,608 | ) |
| Financing
lease obligations, net of current | |
$ | 160,871 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
7 – NOTES PAYABLE
As of March
31, 2023 the Company had the following notes payable outstanding:
| Schedule
of notes payable | |
| | | |
| | |
| | |
March
31, | |
December
31, |
| | |
2023 | |
2022 |
| Loan
Agreement | |
$ | 157,500 | | |
$ | 157,500 | |
| Streeterville
Note #1 | |
| 2,807,500 | | |
| 2,807,500 | |
| Streeterville
Note #2 | |
| 2,807,500 | | |
| — | |
| Netsuite
Cloud Services Financing Agreement | |
| 180,258 | | |
| — | |
| Directors
and Officers Liability Insurance Agreement | |
| 83,131 | | |
| 166,262 | |
| Pinnacle
Note | |
| 4,351,040 | | |
| — | |
| Total | |
| 10,386,929 | | |
| 3,131,262 | |
| Less:
Unamortized debt discount | |
| (469,161 | ) | |
| (267,433 | ) |
| Total
notes payable | |
| 9,917,768 | | |
| 2,863,829 | |
| Notes
payable, current | |
| (4,469,196 | ) | |
| (2,098,685 | ) |
| Notes
payable, non current | |
$ | 5,448,572 | | |
$ | 765,144 | |
Minimum
obligations under these loan agreements are as follows:
| Schedule
of minimum obligations under loan agreement | | |
| | |
2023
(nine months) | | |
$ | 3,434,500 | |
| 2024 | | |
| 6,952,429 | |
| Total | | |
$ | 10,386,929 | |
Loan
Agreement
The
Company entered into a loan agreement in April of 2019 where the company was required to pay $157,500
in five payments in the amount of $30,000
per year, with an additional $7,500,
representing interest, in year two to a loan holder. As of December 31, 2022, the company has an outstanding balance of $157,500,
and no payments have been made as of March 31, 2023.
Streeterville
Note #1
On
October 7, 2022, the Company entered into a Security Purchase Agreement with Streeterville Capital, LLC whereby the Company issued an
8%
unsecured redeemable note in the principal amount of $2,807,500.
The Company received net proceeds of $2,462,500,
after the deduction of debt issuance costs of $345,000.
These fees were recorded as debt discounts, net of the carrying value of the debt, and are being amortized over the life of the loan
using the effective interest rate method. The note has a maturity date of April
7, 2024. At any time following the occurrence
of any event of default, interest shall accrue on the outstanding balance beginning on the date the applicable event of default occurred
at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted under applicable law.
The
lender has the right at any time 6 months after the effective date, at its election, to redeem all or part of the maximum redemption
amount as set forth in the promissory note. Payments of each redemption amount may be made (a) in cash, or (b) in common stock per the
following formula: the portion of the applicable Redemption amount being paid in common stock divided by the common stock redemption
price, or (c) by any combination of the foregoing. Whereas common stock redemption price means 87.5%
multiplied by the Nasdaq minimum price. Whereas Nasdaq minimum price means the lower of: (i) the closing price on the trading day immediately
preceding the date the common stock redemption price is measured; or (ii) the average closing price of the common stock for the five
trading days immediately preceding the date the common stock redemption price is measured.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
7 – NOTES PAYABLE (continued)
Streeterville
Note #1 (Continued)
The
principal amount of the Note may be prepaid in full, or any portion of the outstanding balance earlier than it is due; provided that
in the event borrower elects to prepay all or any portion of the outstanding balance it shall pay to lender 120% of the portion of the
outstanding balance borrower elects to prepay. The prepayment premium will not apply if borrower repays the Note in full on the anniversary
date, which is one year from the purchase price date.
If
prior to the anniversary date all redemption amounts are paid as common stock redemptions, then each time after the anniversary date
that borrower makes a common stock redemption, $8,333
of the monitoring fee will be deducted from the outstanding
balance, not to exceed $50,000.
No interest will accrue on the monitoring fee.
Debt
discount related to the note amounts to $345,000
and is being amortized using the effective interest
method over the term of the note. The effective interest rate of the note is 22.23%.
The Company recorded $86,612
due to debt discount amortization to interest
expense in the accompanying Statement of Operations and as a result, at March 31, 2023, the remaining unamortized balance was $180,821.
Interest
expense recorded in the accompanying Statements of Operations by the Company was $56,150
for the three months ended March 31, 2023.
Streeterville
Note #2
On
January 25, 2023, the Company entered into a Security Purchase Agreement with Streeterville Capital, LLC whereby the Company issued an
8%
unsecured redeemable note in the principal amount of $2,807,500.
The Company received net proceeds of $2,463,000,
after the deduction of debt issuance costs of $344,500.
These fees were recorded as debt discounts, net of the carrying value of the debt, and are being amortized over the life of the loan
using the effective interest rate method. The note has a maturity date of July
25, 2024. At any time following the occurrence
of any event of default, interest shall accrue on the outstanding balance beginning on the date the applicable event of default occurred
at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted under applicable law.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
7 – NOTES PAYABLE (continued)
Streeterville
Notes (Continued)
The
features and conditions relating to this note is similar with the Streeterville note issued on October 7, 2022.
Debt
discount recognized during 2023 related to the note amounts to $344,500
and is being amortized using the effective interest
method over the term of the note. The effective interest rate of the note is 22.23%.
The Company recorded $56,660
due to debt discount amortization to interest
expense in the accompanying Statement of Operations and as a result, at March 31, 2023, the remaining unamortized balance was $287,840.
Interest
expense recorded in the accompanying Statements of Operations by the Company was $40,553
for the three months ended March 31, 2023.
Netsuite
Cloud Services Financing Agreement
On
November 1, 2022, PURO entered into a financing arrangement for $225,323
to finance its Netsuite cloud services. The Company
is required to pay $7,511
per month through April 1, 2025. The liability
was assumed in connection with the business combination on January 26, 2023. As of March 31, 2023, the outstanding balance of the financing
agreement was $180,258.
Directors
and Officers Liability Insurance Agreement
On
August 28, 2022, the Company entered into a one-year Directors and Officers Liability Insurance agreement for $318,833.
Under the terms of the agreement, the Company made a down payment of $41,730,
with the remaining balance financed over the remaining term at an annual percentage rate of 5.05%.
Beginning in September 2022, the Company is making 10 monthly payments of $27,710,
with the last payment expected to be made in June 2023. At March 31, 2023, the outstanding balance on the note payable was $83,131.
The interest expense for the three months ended March 31, 2023 was immaterial to the consolidated financial statements.
Pinnacle
Note
In
December 2022, the Company entered into a Loan and Security Agreement, or (the “Loan Agreement”), with Pinnacle Bank, which
provides for a $5,000,000
secured revolving credit facility (the “Loan
Facility”). The
loan is subject to a maximum advance rate of up to 85% of net face amount of eligible accounts, plus the lessor a) of the sum of 20%
of the aggregate eligible inventory value of raw materials and 35% of the aggregate eligible inventory value of finished goods, b) $1
million, c) 80% of the net orderly liquidation value of raw materials and finished goods, or d) 100% of the aggregate outstanding principal
amount of advances. In no event shall the aggregate amount of the outstanding advances under the Loan Facility be greater than $5 million.
The loan matures on December 9, 2024. The principal
amount of outstanding revolving loan, together with accrued and unpaid interest, is due on the maturity date.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
7 – NOTES PAYABLE (continued)
Pinnacle
Note (Continued)
The
loan accrues interest at a 1.50% margin above the greater of the prime rate or 4.00%. The interest margin is increased to 2.00% in respect
to the advances against eligible inventory. If the Company fails to perform any covenant, term or provision of the Loan Agreement, then
interest shall accrue at the rate of 6.0% above the interest rate. If after the occurrence of an event of default and the loan is not
paid in full by the maturity date, the loan shall bear interest at the rate of 18.0% above the interest rate.
Obligations
under the Loan Agreement are secured by all the Company's assets. On the effective date the Company paid a loan fee of 2%
of the amount of the Loan Facility and will be required to pay a loan fee of 1.5%
of the amount of the Loan Facility annually thereafter.
The
Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company
and the Subsidiaries, including, without limitation, restrictions on liens, indebtedness, fundamental changes, capital expenditures,
consignments of inventory and distributions.
The
Loan Agreement contains customary events of default, including, without limitation, payment defaults, covenant defaults, breaches of
certain representations and warranties, certain events of bankruptcy and insolvency, certain events under ERISA and judgments. If an
event of default occurs and is not cured within any applicable grace period or is not waived, the Lender is entitled to take various
actions, including, without limitation, the acceleration of amounts due thereunder and termination of commitments under the Loan Facility.
There
was a $4,351,040
outstanding balance under the Loan Facility as
of March 31, 2023 which has all been classified as long term.
Chase
Credit Facility
In
connection with the acquisition of LED Supply Co, LLC, the Company assumed $1,728,474
in principal and $71,724
in accrued interest relating to a credit facility
issued by JP Morgan Chase Bank. On March 15, 2023, the Company paid the principle in full and accrued interest of $71,724,
for an aggregate payment of $1,800,199,
by drawing down on the Company’s credit facility with Pinnacle Bank.
NOTE
8 – FAIR VALUE MEASUREMENTS
Accounting
guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following
categories of the fair value hierarchy:
Level
1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market.
Level
2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data.
Level
3– Based on unobservable inputs that reflect the entity’s own assumptions about the assumptions that a market participant
would use in pricing the asset or liability.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
8 – FAIR VALUE MEASUREMENTS (CONTINUED)
We
did not have any transfers between levels during the periods presented.
The
following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis
as of March 31, 2023 and December 31, 2022:
| Fair
value, assets measured on recurring basis | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Carrying
Amount | |
Fair
Value | |
Quoted
Priced in active markets (Level 1) | |
Significant
other observable inputs (Level 2) | |
Significant
unobservable inputs (Level 3) |
| | |
As
of March 31, 2023 |
| Assets | |
| |
| |
| |
| |
|
| Money
market funds | |
$ | 26,906 | | |
$ | 26,906 | | |
$ | 26,906 | | |
$ | — | | |
$ | — | |
| Total
assets | |
$ | 26,906 | | |
$ | 26,906 | | |
$ | 26,906 | | |
$ | — | | |
$ | — | |
| Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
| Contingent
consideration | |
$ | 18,995,673 | | |
$ | 18,995,673 | | |
$ | 4,339,999 | | |
$ | — | | |
$ | 14,655,674 | |
| Warrant
liability | |
| 7,685 | | |
| 7,685 | | |
| — | | |
| — | | |
| 7,685 | |
| Total
liabilities | |
$ | 19,003,358 | | |
$ | 19,003,358 | | |
$ | 4,339,999 | | |
$ | — | | |
$ | 14,663,359 | |
| | |
| |
| | |
| As
of December 31, 2022 |
| Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
| Money
market funds | |
$ | 26,828 | | |
$ | 26,828 | | |
$ | 26,828 | | |
$ | — | | |
$ | — | |
| Total
assets | |
$ | 26,828 | | |
$ | 26,828 | | |
$ | 26,828 | | |
$ | — | | |
$ | — | |
| Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
| Warrant
liability | |
| 9,987 | | |
| 9,987 | | |
| — | | |
| — | | |
| 9,987 | |
| Total
liabilities | |
$ | 9,987 | | |
$ | 9,987 | | |
$ | — | | |
$ | — | | |
$ | 9,987 | |
The
carrying amounts of accounts receivable, accounts payable and short-term debt approximated fair values as of March 31, 2023 and December
31, 2022 because of the relatively short maturity of these instruments. There were no other level 3 or level 1 assets or liabilities
as of March 31, 2023.
Money
market funds – Cash equivalents of $26,906
and $26,828
as of March 31, 2023 and December 31, 2022, respectively,
consisted of money market funds. Money market funds are classified as Level 1 of the fair value hierarchy because they are valued using
quoted market prices in active markets.
Contingent
consideration – The fair value of the contingent consideration related to the Make Whole is derived through the quoted market price
of our stock, which represents a Level 1 measurement within the fair value hierarchy. As a result of the merger transaction, the company
assumed an Earn-out liability, which is remeasured each reporting period. Given the unobservable nature of the inputs, the fair value
measurement of the deferred earn-out is deemed to use Level 3 inputs. The Earn-out liability was accounted for as a liability as of the
date of the merger transaction and will be remeasured to fair value until the Earnout Triggering Events are met.
Warrant
liability – The fair value of the warrant liability is derived through the Black Scholes method and is based on significant inputs
not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
8 – FAIR VALUE MEASUREMENTS (CONTINUED)
Other
Fair Value Measurements
In addition
to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also
record assets and liabilities at fair value on a nonrecurring basis.
In
connection with the acquisitions of VisionMark in 2022, and PURO Lighting and LED Supply Co. in 2023, as discussed in Note 2, we used
various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and the relief-from-royalty,
a form of the multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value
hierarchy.
NOTE
9 – STOCKHOLDERS' EQUITY
At
the Market Sales Agreement
On
July 1, 2022, the Company filed a $50,000,000
mixed use shelf registration (Form S-3) and entered
into an At The Market sales agreement ("ATM") with Maxim Group, LLC for a total of $9,000,000,
as a readily available source of funding if needed. During the year ended December 31, 2022 the Company sold 804,811
ATM shares through the sales agent with gross
proceeds of $964,083.
In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $28,922.
As of March 31, 2023, an additional 1,764,311
shares have been sold for gross proceeds of $2,314,860,
and the compensation paid by the Company to the Sales Agent was $69,446,
leaving a balance of $5,721,057
on the ATM facility. The shelf registration statement
will expire on July
12, 2025.
In
May 2023 the Company sold an additional 53,903
ATM shares, with gross proceeds of $27,224,
and sales agent compensation of $817,
yielding net proceeds of $26,407.
The balance on the ATM facility is currently $5,693,833.
Amendment
of the Certificate of Designation
In
relation to designated shares of the Company’s Series X Super Voting Preferred stock, on July 11, 2022, the Board of Directors
approved the reissuance of 8,000 of these shares which represent the remainder of the designated but unissued shares of Super Voting
Preferred Stock.
On
March 9, 2022, the Board of Directors approved a resolution that authorized the senior management of the Company to purchase up to and
limited to one million shares of common stock between March 10, 2022 and September 30, 2022. As of March 31, 2023, the Company has a
total of 113,485 treasury
shares.
Pursuant
to the Company’s amended and restated certificate of incorporation, as amended, the Company is authorized to designate and issue
up to 20,000,000
shares of preferred stock, par value $0.0001
per share, in one or more classes or series.
During the year ended December 31, 2022, the Company had 10,000
preferred shares designated as Series X Preferred
Stock and 19,990,000 shares
of preferred stock designated as 10.5% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). As
of March 31, 2023 the Company had 1,250,000
preferred shares designated as Series B Preferred
Stock, 2,500,000
preferred shares designated as Series C Preferred
Stock, 10,000
preferred shares designated as Series X Preferred
Stock, 1,250,000
shares designated as 10.5% Series A Cumulative
Perpetual Preferred Stock, and 14,990,000
shares undesignated.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
9 – STOCKHOLDERS' EQUITY (CONTINUED)
Preferred
Stock, Series A Cumulative Perpetual
Holders
are entitled to receive cumulative cash dividends at the annual rate of 10.5% on $25.00 liquidation preference per share of the Series
A Perpetual Preferred Stock. Dividends accrue and are payable in arrears beginning August 15, 2021, regardless of whether declared or
there are sufficient earnings or funds available for payment. Sufficient net proceeds from the offering must be set aside to pay dividends
for the first twelve months from issuance. The Company has an optional redemption right beginning July 16, 2022, which redemption price
declines annually. The initial redemption price after year 1 is $30 and decreases annually over 5 years to $25 per share. The Company
also has a special optional redemption right upon the occurrence of a Delisting Event or Change of Control, as defined, at $25 per share
plus accrued and unpaid dividends. The holders have no voting rights, except for voting on certain corporate decisions, or upon default
in payment of dividends for any twelve periods, in which case the holders would have voting rights to elect two additional directors
to serve on the Board of Directors. Such shares are not convertible unless and until the occurrence of a Delisting Event or Change of
Control and when the Company has not exercised its special optional redemption right. The conversion price would be the lesser of the
amount converted based on the $25.00 liquidation preference plus accrued dividends divided by the common stock price of the Delisting
Event or Change of Control (as defined) or $5.353319 (Share Cap). Effectively, the Share Cap limits the common stock price to no lower
than $4.67.
Preferred
Stock, Series B Cumulative Perpetual
On
January 25, 2023, the Company filed the Certificate of Designations, Rights, and Preferences for the Series B Preferred Stock with the
Secretary of State of the State of Delaware, which became effective upon acceptance for record. On January 26, 2023, the Company filed
the Amendment to the Series B Certificate of Designation (together with the Certificate of Designations, Rights, and Preferences for
the Series B Preferred Stock, the “Series B Certificate of Designation”), which became effective upon acceptance for record.
The Series B Certificate of Designation classified a total of 1,250,000
shares of the Company’s authorized shares
of preferred stock, $0.0001
par value per share, as Series B Preferred Stock.
As set forth in the Series B Certificate of Designation, the Series B Preferred Stock ranks, as to dividend rights and rights upon the
Company’s liquidation, dissolution or winding up: (i) senior to all classes or series of Common Stock and to all other equity securities
issued by the Company expressly designated as ranking junior to the Series B Preferred Stock; (ii) on parity with the Company’s
10.5% Series A Cumulative Perpetual Preferred Stock; (iii) at least on parity with any future class or series of the Company’s
equity securities designated on or after January 25, 2023, including the Company’s 5% Series C Cumulative Perpetual Preferred Stock;
and (iv) effectively junior to all the Company’s existing and future indebtedness (including indebtedness convertible into Common
Stock or preferred stock) and to the indebtedness and other liabilities of the Company’s existing or future subsidiaries. Holders
of Series B Preferred Stock, when and as authorized by the Company’s Board of Directors, are entitled to cumulative cash dividends
at the rate of 2%
of the $6 per
share liquidation preference per year (equivalent to $0.12
per share per year). Dividends will be payable
quarterly in arrears, on or about the 15th day after the end of a quarterly period, beginning on April 15, 2023. The holders of Series
B Preferred Stock, at his, her, or its option, can require the Company to redeem all or a portion of the Series B Preferred Stock at
any time and from time to time held by such holder after 30 months from the original issue date at a redemption price of $2.00
per share, plus any accrued and unpaid dividends
(whether or not authorized or declared), up to but not including the date fixed for redemption, without interest, to the extent the Company
has funds legally available therefor; provided that if a holder requires the Company to redeem all or a portion of the Series B Preferred
Stock at any time and from time to time held by such holder on or after the five (5) year anniversary of the original issue date, the
redemption price will be $6.00
per share, plus any accrued and unpaid dividends
(whether or not authorized or declared), up to but not including the date fixed for redemption, without interest, to the extent the Company
has funds legally available therefor. The Series B Certificate of Designation provides for a special optional redemption by the Company
upon a change of control, in whole or in part, for $6.00
per share, plus accrued but unpaid dividends
to, but not including the redemption date. The holders of Series B Preferred Stock neither have voting nor preemptive rights. Each share
of Series B Preferred Stock is convertible, at any time and from time to time from and after the original issue date, at the option of
the holder, into one share of Common Stock. The Series B Preferred Stock has no stated maturity and will not be subject to any sinking
fund for the payment of the redemption price or mandatory redemption. The Series B Preferred Stock has been classified as temporary equity,
outside of permanent equity, as they are redeemable at the option of the holder.
Upon
any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, before any distribution or payment shall be
made to holders of shares of Common Stock or any other class or series of capital stock of the Corporation ranking, as to rights upon
any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, junior to the Series B Preferred Stock, the
holders of shares of Series B Preferred Stock shall be entitled to be paid out of the assets of the Corporation legally available for
distribution to its stockholders, a liquidation preference of $6.00
per share, plus an amount equal to any accrued
and unpaid dividends (whether or not authorized or declared) up to the date of payment. In the event that, upon such voluntary or involuntary
liquidation, dissolution, or winding up, the available assets of the Corporation are insufficient to pay the full amount of the liquidating
distributions on all outstanding shares of Series B Preferred Stock and the corresponding amounts payable on all shares of other classes
or series of capital stock of the Corporation ranking, as to rights upon the Corporation's liquidation, dissolution, or winding up, on
parity with the Series B Preferred Stock in the distribution of assets, then the holders of the Series B Preferred Stock and each such
other class or series of capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution, or winding up,
on parity with the Series B Preferred Stock shall share ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled. Written notice of any such voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable
in such circumstances shall be payable, shall be given not fewer than thirty (30) days or more than sixty (60) days prior to the payment
date stated therein, to each record holder of shares of Series B Preferred Stock at the respective addresses of such holders as the same
shall appear on the stock transfer records of the Corporation. After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series B Preferred Stock will have no right or claim to any of the remaining assets of the Corporation.
The consolidation, merger, or conversion of the Corporation with or into any other corporation, trust, or entity, or the voluntary sale,
lease, transfer, or conveyance of all or substantially all of the property or business of the Corporation, shall not be deemed to constitute
a liquidation, dissolution, or winding up of the Corporation.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
9 – STOCKHOLDERS' EQUITY (CONTINUED)
Preferred
Stock, Series C Cumulative Perpetual
On
January 25, 2023, the Company filed the Certificate of Designations, Rights, and Preferences for the Series C Preferred Stock with the
Secretary of State of the State of Delaware, which became effective upon acceptance for record. On January 26, 2023, the Company filed
the Amendment to the Series C Certificate of Designation (together with the Certificate of Designations, Rights, and Preferences for
the Series C Preferred Stock, the “Series C Certificate of Designation”), which became effective upon acceptance for record.
The Series C Certificate of Designation classified a total of 2,500,000
shares of the Company’s authorized shares
of preferred stock, $0.0001
par value per share, as Seftificate of Designation
classified a totalries C Preferred Stock. As set forth in the Series C Certificate of Designation, the Series C Preferred Stock will
rank, as to dividend rights and rights upon the Company’s liquidation, dissolution or winding up: (i) senior to all classes or
series of Common Stock and to all other equity securities issued by the Company expressly designated as ranking junior to the Series
C Preferred Stock; (ii) on parity with any future class or series of the Company’s equity securities expressly designated as ranking
on parity with the Series C Preferred Stock; (iii) junior to all equity securities issued by the Company with terms specifically providing
that those equity securities rank senior to the Series C Preferred Stock with respect to the payment of dividends and the distribution
of assets upon liquidation, dissolution or winding up; and (iv) effectively junior to all the Company’s existing and future indebtedness
(including indebtedness convertible into Common Stock or preferred stock) and to the indebtedness and other liabilities of the Company’s
existing or future subsidiaries. Holders of Series C Preferred Stock, when and as authorized by the Company’s Board of Directors,
are entitled to cumulative cash dividends at the rate of 5%
of the $5.00
per share liquidation preference per year (equivalent
to $0.25
per share per year). Dividends will be payable
quarterly in arrears, on or about the 15th day after the end of a quarterly period, beginning on April 15, 2023. The Company, to the
extent it has legally available funds, must redeem all shares of Series C Preferred Stock on the date that is three years from January
26, 2023. The Series C Certificate of Designation provides for a special optional redemption by the Company upon a change of control,
in whole or in part, for $5.00
per share, plus accrued but unpaid dividends
to, but not including the redemption date. The holders of Series C Preferred Stock neither have voting nor preemptive rights. Each share
of Series C Preferred Stock will be convertible, at any time and from time to time from and after January 26, 2023, at the option of
the holder, into one share of Common Stock. The Series C Preferred Stock has no stated maturity and will not be subject to any sinking
fund for the payment of the redemption price or mandatory redemption. The Series C Preferred Stock shall be classified as temporary equity,
outside of permanent equity, as they are redeemable at a fixed or determinable price on a fixed or determinable date.
Upon
any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, before any distribution or payment shall be
made to holders of shares of Common Stock or any other class or series of capital stock of the Corporation ranking, as to rights upon
any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, junior to the Series C Preferred Stock, the
holders of shares of Series C Preferred Stock shall be entitled to be paid out of the assets of the Corporation legally available for
distribution to its stockholders, after payment of or provision for the debts and other liabilities of the Corporation and any class
or series of capital stock of the Corporation ranking, as to rights upon any voluntary or involuntary liquidation, dissolution, or winding
up of the Corporation, senior to the Series C Preferred Stock, a liquidation preference of $5.00
per share, plus an amount equal to any accrued
and unpaid dividends (whether or not authorized or declared) up to the date of payment. In the event that, upon such voluntary or involuntary
liquidation, dissolution, or winding up, the available assets of the Corporation are insufficient to pay the full amount of the liquidating
distributions on all outstanding shares of Series C Preferred Stock and the corresponding amounts payable on all shares of other classes
or series of capital stock of the Corporation ranking, as to rights upon the Corporation's liquidation, dissolution, or winding up, on
parity with the Series C Preferred Stock in the distribution of assets, then the holders of the Series C Preferred Stock and each such
other class or series of capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution, or winding up,
on parity with the Series C Preferred Stock shall share ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled. Written notice of any such voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable
in such circumstances shall be payable, shall be given not fewer than thirty (30) days or more than sixty (60) days prior to the payment
date stated therein, to each record holder of shares of Series C Preferred Stock at the respective addresses of such holders as the same
shall appear on the stock transfer records of the Corporation. After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series C Preferred Stock will have no right or claim to any of the remaining assets of the Corporation.
The consolidation, merger, or conversion of the Corporation with or into any other corporation, trust, or entity, or the voluntary sale,
lease, transfer, or conveyance of all or substantially all of the property or business of the Corporation, shall not be deemed to constitute
a liquidation, dissolution, or winding up of the Corporation.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
9 – STOCKHOLDERS' EQUITY (continued)
A
summary of the Company’s option activity and related information follows:
| Schedule
of the Company’s option activity | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Number
of Options | |
Weighted-Average
Exercise Price | |
Weighted-Average
Grant Date Fair Value | |
Weighted-Average
Remaining Contractual Life (in years | |
Aggregate
intrinsic value |
| Balances,
January 1, 2022 | |
| 644,314 | | |
$ | 7.11 | | |
$ | 5.03 | | |
| 8.47 | | |
$ | — | |
| Options
granted | |
| 639,000 | | |
| 1.66 | | |
| 1.06 | | |
| 10.00 | | |
| — | |
| Options
forfeited | |
| (283,286 | ) | |
| 7.02 | | |
| — | | |
| | | |
| — | |
| Options
exercised | |
| — | | |
| — | | |
| — | | |
| | | |
| — | |
| Balances,
December 31, 2022 | |
| 1,000,028 | | |
$ | 3.61 | | |
$ | — | | |
| 9.03 | | |
$ | — | |
| Options
granted | |
| 480,000 | | |
| 2.00 | | |
| 0.87 | | |
| 10.0 | | |
| — | |
| Options
forfeited | |
| (178,833 | ) | |
| 1.85 | | |
| — | | |
| | | |
| — | |
| Options
exercised | |
| — | | |
| — | | |
| — | | |
| | | |
| — | |
| Balances,
March 31, 2023 | |
| 1,301,195 | | |
$ | 3.27 | | |
$ | — | | |
| 9.39 | | |
$ | — | |
| Vested
and Exercisable | |
| 346,867 | | |
$ | 5.55 | | |
| | | |
| | | |
$ | — | |
Share-based
compensation expense for options totaling $160,598
and $222,062
was recognized for the three months ended March
31, 2023 and 2022, respectively, based on requisite service periods.
The
valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing model.
The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest
rate, and the weighted average expected life of the options.
The
risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is
appropriate for the term of the options.
Estimated
volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected
life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of peer entities over
a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient
historical data of its stock price.
As
of March 31, 2023, there was $1,301,651
of total unrecognized compensation expense related
to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over
a weighted average period of approximately 2.65 years.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
9– STOCKHOLDERS' EQUITY (continued)
The
weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the three months ended March
31, 2023 and 2022 are set forth in the table below.
| Schedule
of share-based payment award, stock options, valuation assumptions | |
| | | |
| | |
| | |
2023 | |
2022 |
| Risk-free
interest rate | |
| 3.53%
to 3.60% | | |
| 1.26%
to 2.39% | |
| Volatility | |
| 90.27%
to 91.01% | | |
| 78.95%
to 79.91% | |
| Expected
life (years) | |
| 5.83-6.06 | | |
| 5.75-6.08 | |
| Dividend
yield | |
| 0.00% | | |
| 0.00% | |
Common
Stock Warrants
A summary
of the Company’s warrant activity and related information follows:
| Schedule
of the Company's warrant activity | |
| | | |
| | |
| | |
Number
of Options | |
Weighted-Average
Exercise Price |
| Balances,
January 1, 2022 | |
| 192,419 | | |
$ | 5.84 | |
| Granted | |
| — | | |
| — | |
| Exercised | |
| — | | |
| — | |
| Balances,
December 31, 2022 | |
| 192,419 | | |
$ | 5.84 | |
| Granted | |
| — | | |
| — | |
| Exercised | |
| — | | |
| — | |
| Balances,
March 31, 2023 | |
| 192,419 | | |
$ | 5.84 | |
| At
March 31, 2023 | |
| | | |
| | |
| Vested
and Exercisable | |
| 192,419 | | |
$ | 5.84 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
9 – STOCKHOLDERS' EQUITY (continued)
In
relation to the common stock offering that was closed last December 28, 2021, on January 5, 2022, the underwriters fully exercised their
over-allotment option to purchase an additional 400,000
shares of common stock at the public offering
price of $3.00
per share. The Company received gross proceeds
of $1,200,000
for the over-allotment, which resulted in net
proceeds to us of $1,092,000,
after deducting underwriting discounts and commissions of $108,000.
Restricted
Stock Awards
The
Company records compensation expense for restricted stock awards based on the quoted market price of our stock at the grant date and
the expense is amortized over the vesting period. These restricted stock awards are subject to time-based vesting conditions based on
the continued service of the restricted stock award holder.
The following
table presents the restricted stock units activity from January 1, 2022 through March 31, 2023:
| Schedule
of unvested restricted stock units activity | |
| | | |
| | |
| | |
Number
of Shares | |
Weighted-Average
Fair Market Value |
| Unvested
shares at January 1, 2022 | |
| 292,500 | | |
$ | 4.71 | |
| Granted
and unvested | |
| 207,500 | | |
| 2.10 | |
| | |
| | | |
| | |
| Vested | |
| (100,966 | ) | |
| 3.88 | |
| Forfeited/Cancelled | |
| (311,535 | ) | |
| 4.45 | |
| Unvested
shares, December 31, 2022 | |
| 87,499 | | |
$ | 2.38 | |
| Granted
and unvested | |
| 55,000 | | |
| 1.01 | |
| Vested | |
| (34,167 | ) | |
| 2.83 | |
| Forfeited/Cancelled | |
| (15,000 | ) | |
| 1.16 | |
| Unvested
shares, March 31, 2023 | |
| 93,332 | | |
$ | 1.36 | |
| Vested
as of March 31, 2023 | |
| 340,837 | | |
$ | 4.57 | |
Upon
vesting, the restricted stock units are converted to common shares. Based on the terms of the restricted share and restricted stock unit
grants, all forfeited shares revert back to the Company.
In
connection with the grant of restricted shares, the Company recognized $29,017
and $65,938
of compensation expense within its statements
of operations for the three months ended March 31, 2023 and 2022, respectively.
An
additional 28,049
shares of restricted stock were issued on April
19, 2023, as compensation for consulting expenses.
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
10 - LEASING ARRANGEMENTS
The
Company determines whether an arrangement qualifies as a lease under ASC 842 at inception. The Company has operating leases for office
space and office equipment. The Company’s leases have remaining lease terms of one year to seven years, some of which include options
to extend the lease term for up to five years. The Company considered these options to extend in determining the lease term used to establish
the Company’s right-of use assets and lease liabilities once reasonably certain of exercise. The Company’s lease agreements
do not contain any material residual value guarantees or material restrictive covenants.
ROU
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at
the lease commencement date based on the present value of the future lease payments over the lease term. The operating lease ROU asset
also includes any lease payments made in advance of lease commencement and excludes lease incentives. The lease terms used in the calculations
of the operating ROU assets and operating lease liabilities include options to extend or terminate the lease when the Company is reasonably
certain that it will exercise those options. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
As
the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate of 7.6%
based on the information available at commencement date in determining the present value of lease payments.
MunnWorks,
LLC entered into a lease agreement in Mount Vernon, New York for a term that commenced on April 1, 2019 and will expire on the 31st day
of March 2024 at a monthly rate of $13,400. In March of 2021, the Company obtained additional lease space and the agreement was amended
to increase rent expense to $15,000 per month. On July 1, 2021, the Company again obtained additional lease space and rent expense was
increased to $27,500 per month through July 1, 2024 and $29,150 per month from July 1, 2024 through July 1, 2026.
On
September 28, 2021, the Company entered into a lease agreement in Kennesaw, Georgia for office and production space for a term that commenced
on September 29, 2021 and will expire on October 1, 2024, with a rate ranging from $14,729 to $15,626 per month.
On
April 1, 2022, the Company entered into a lease agreement in Brooklyn, New York for office and production space that commenced on April
1, 2022 and will expire on June 1, 2023, with a rate ranging from $94,529 to $97,365 per month. On December 31, 2022, the Company exercised
its option to renew the first renewal term, commencing on July 1, 2023 and ending on June 30, 2025. As a result of the extension of the
lease, the Company recorded an additional $2,146,785 of ROU asset and liability on the balance sheet on December 31, 2022.
On
January 26, 2023, the Company entered into a lease agreement in Lakewood, Colorado for office and production space that commenced on
January 27, 2023 and will expire on January 27,
2026, with a rate ranging from $17,000
to $18,387
per month.
Rent
expense for the three months ended March 31, 2023 and 2022 was $420,107
and $101,799,
respectively.
Schedule
maturities of operating lease liabilities outstanding as of March 31, 2023 are as follows:
| Schedule
of maturities of operating lease liabilities | |
| | |
| 2023
(9 months) | |
$ | 1,432,211 | |
| 2024 | |
| 1,914,174 | |
| 2025 | |
| 1,190,213 | |
| Thereafter... | |
| 174,900 | |
| Total
lease payments | |
| 4,711,498 | |
| Less:
Imputed Interest | |
| (440,296 | ) |
| Present
value of future minimum lease payments | |
$ | 4,271,202 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
10 - LEASING ARRANGEMENTS (CONTINUED)
Consistent
with ASC 842-20-50-4, the Company calculated its total lease cost based solely on its monthly rent obligation. The Company had no cash
flows arising from its lease, no finance lease cost, short term lease cost, or variable lease costs. The Company’s lease does not
produce any sublease income, or any net gain or loss recognized from sale and leaseback transactions. As a result, the Company did not
need to segregate amounts between finance and operating leases for cash paid for amounts included in the measurement of lease liabilities,
segregated between operating and financing cash flows; supplemental non-cash information on lease liabilities arising from obtaining
right-of-use assets; weighted-average calculations for the remaining lease term; or the weighted-average discount rate.
NOTE
11 - SEGMENT REPORTING
FASB
Codification Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s
reportable segments. The Company has two reportable segments: the design, manufacture, assembly and distribution of disinfecting systems
for use in healthcare, hospitality, and commercial municipal and residential markets (disinfectant segment) and the manufacture of fine
mirrors specifically for the hospitality industry (hospitality segment). The segments are determined based on several factors, including
the nature of products and services, the nature of production processes, customer base, delivery channels and similar economic characteristics.
An
operating segment’s performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is
defined as net sales less cost of sales, segment selling, general and administrative expenses, research and development costs and stock-based
compensation. It does not include other charges (income), net and interest and other, net.
| Schedule
of segment reporting | | |
| | | |
| | | |
| | | |
| | |
| | |
Hospitality | |
Disinfection/Healthy
Building Technologies | |
Corporate | |
Total |
| Balance
sheet at March 31, 2023 | | |
| | | |
| | | |
| | | |
| | |
| Assets | | |
$ | 10,738,154 | | |
$ | 59,698,939 | | |
$ | 2,516,239 | | |
$ | 72,953,332 | |
| Liabilities | | |
$ | 10,306,177 | | |
$ | 29,743,519 | | |
$ | 9,332,394 | | |
$ | 49,382,090 | |
| Balance
sheet at December 31, 2022 | | |
| | | |
| | | |
| | | |
| | |
| Assets | | |
$ | 9,638,828 | | |
$ | 19,831,097 | | |
$ | 3,257,502 | | |
$ | 32,727,427 | |
| Liabilities | | |
$ | 10,666,643 | | |
$ | 1,545,217 | | |
$ | 3,281,672 | | |
$ | 15,493,532 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
11 - SEGMENT REPORTING (CONTINUED)
| | |
Hospitality | |
Disinfection/Healthy
Building technologies | |
Corporate | |
Total |
| Income
Statement for the three months ended March 31, 2023: | |
| | | |
| | | |
| | | |
| | |
| Net
Sales | |
$ | 6,081,373 | | |
$ | 4,573,110 | | |
$ | — | | |
$ | 10,654,483 | |
| Cost
of Goods Sold | |
$ | 5,306,186 | | |
$ | 3,425,911 | | |
$ | — | | |
$ | 8,732,097 | |
| Research
and development | |
$ | — | | |
$ | 189,210 | | |
$ | — | | |
$ | 189,210 | |
| Stock
based compensation | |
$ | 56,854 | | |
$ | 36,176 | | |
$ | 96,585 | | |
$ | 189,615 | |
| Income
Statement for the three months ended March 31, 2022: | |
| | | |
| | | |
| | | |
| | |
| Net
Sales | |
$ | 1,409,250 | | |
$ | 1,946,840 | | |
$ | — | | |
$ | 3,356,090 | |
| Cost
of Goods Sold | |
$ | 1,158,644 | | |
$ | 1,048,347 | | |
$ | — | | |
$ | 2,206,991 | |
| Research
and development | |
$ | — | | |
$ | 59,314 | | |
$ | — | | |
$ | 59,314 | |
| Stock
based compensation | |
$ | 86,011 | | |
$ | 22,286 | | |
$ | 179,702 | | |
$ | 287,999 | |
| Loss
on impairment of goodwill | |
$ | — | | |
$ | 1,138,203 | | |
$ | — | | |
$ | 1,138,203 | |
| Selling,
General and Administrative expenses | |
$ | 659,088 | | |
$ | 1,785,210 | | |
$ | 368,929 | | |
$ | 2,813,227 | |
Applied
UV, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
NOTE
12 – PROFORMA FINANCIAL STATEMENTS (UNAUDITED)
Unaudited
Supplemental Pro Forma Data
Unaudited
pro forma results of operations for the three months ended March 31, 2023 and 2022 as though the company acquired Akida, KES, VisionMark,
SciAir, PURO, and LED (the “Acquired Companies”) on January 1, 2022 is set forth below.
| Business
acquisition, pro forma information | |
| | | |
| | |
| | |
Three
Months Ended March 31, |
| | |
2023 | |
2022 |
| Net
Sales | |
$ | 11,173,416 | | |
$ | 9,415,436 | |
| Net
Loss | |
$ | (4,541,839 | ) | |
$ | (2,777,628 | ) |
| | |
| | | |
| | |
| Net
Loss attributable to common stockholders: | |
| | | |
| | |
| Dividends
to preferred shareholders | |
| (362,250 | ) | |
| (362,250 | ) |
| Net
Loss attributable to common stockholders | |
| (4,904,089 | ) | |
| (3,139,878 | ) |
| Basic
and Diluted Loss Per Common Share | |
$ | (0.29 | ) | |
$ | (0.19 | ) |
| Weighted
Average Shares Outstanding - basic and diluted | |
| 18,448,008 | | |
| 16,810,671 | |
NOTE
13 – SUBSEQUENT EVENTS
On
May 1, 2023 the Company entered into an agreement to amend certain terms in its redeemable promissory notes with Streeterville Capital,
LLC which were previously issued on October 7, 2022 and January 24, 2023. The amendment to the notes makes the accrued interest incurred
from these notes part of the principal balance of the note. The new principal balances for the 2022 and 2023 notes are $3,003,993
and $2,903,030,
respectively. In addition, in consideration of lender's grant of the extension of Redemption date, which is initially 6 months from the
Purchase Price Date to 11 months from the Purchase Price Date, its fees incurred in preparing the amendment and other accommodations,
an extension fee of $65,000
and $35,000
for the 2022 and 2023 notes, respectively, are
to be paid.
Amortization
of the amended notes begin on September 7, 2023 for the 2022 note and September 24, 2023 for the 2023 note.