Bluejay Diagnostics, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. For additional discussion, see “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS” above. Overview We are a late-stage pre-revenue company focused on improving patient outcomes through a more cost efficient, rapid, near patient product for triage, diagnosis and monitoring of disease progression. We believe there is a market need for an on-site and rapid diagnostic system that can be employed for testing and monitoring. Our diagnostic system, which we refer to as “Symphony,” is an exclusively licensed, patented, low-cost, system that consists of a small footprint instrument and single-use indication specific test cartridges, that we believe, if cleared, authorized, or approved by the U.S. Food and Drug Administration (“FDA”), can provide a solution to this market need with rapid laboratory quality results in approximately 24 minutes, in the clinic, Intensive Care Unit (“ICU”), Emergency Room (“ER”) and in other hospital and clinical setting settings where rapid and reliable results are required. Currently, testing is generally performed in a laboratory, and we estimate that the transportation and logistics of transporting the samples to the lab and obtaining the result takes between 8-48 hours. Our platform is a sample-to-result system that has been shown in a clinical study to provide results in 24 minutes. Our business model is to generate revenue from the sale of the table-top Symphony instrument, and from the sale of single-use indication specific cartridges that are used by the Symphony instrument for the diagnostic test. Once the test material (generally a small volume blood sample) is transferred to a single-use indication specific Symphony cartridge, no additional sample preparation or pre-processing is required. Since inception, we have incurred net losses from operations each year and we expect to continue to incur losses for the foreseeable future. We incurred net losses of approximately $3.5 million , and $1.2 million for the years ended December 31, 2021 and 2020, respectively. We had negative cash flow from operating activities of approximately $4.4 million and $0.5 million for the years ended December 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately $7.8 million as of December 31, 2021. Results of Operations Comparison of Years Ended December 31, 2021 and 2020 The following table sets forth our results of operations for the years ended December 31, 2021 and 2020: Year Ended December 31, 2021 2020 Operating expenses: Research and development $ 1,147,955 $ 527,253 General and administrative 1,792,482 596,116 Marketing and business development 289,726 73,022 Total operating expenses 3,230,163 1,196,391 Operating loss (3,230,163 ) (1,196,391 ) Other income (expense): Gain on forgiveness of note payable, Paycheck Protection Program 5,000 102,000 Derivative warrant liability gain (loss) 9,676 (42,434 ) Interest expense, net of amortization of premium (367,459 ) (26,997 ) State grant revenue 75,000 - Other income 19,648 5,537 Total other income (expense), net (258,135 ) 38,106 Net loss $ (3,488,298 ) $ (1,158,285 ) Research and Development Research and development expenses increased approximately $621,000, or 118%, for the year ended December 31, 2021, as compared to the same period of 2020. The increase was primarily due to expenses incurred totaling approximately $522,000 in connection with the clinical trials and manufacturing costs related to the Symphony analyzers. 36 General and Administrative General and administrative expenses increased approximately $1.2 million, or 201%, for the year ended December 31, 2021, as compared to the same period of 2020. The increase was primarily attributable to increased operating expenses related to the company’s transition from a private to public company, including the addition of accounting, legal and audit related expenses totaling approximately $670,000. In addition, expenses related to employee compensation and benefits increased by approximately $309,000 due to an increase in general and administrative headcount. Expense for expiring inventory of approximately $85,000 was recorded in 2021, versus no such expense recorded during 2020. Marketing and Business Development Marketing and business development expenses increased approximately $217,000, or 297%, for year end December 31, 2021, as compared to the same period of 2020. The increase was primarily attributable to increased expenses of approximately $218,000 paid to employees and consultants to expand the commercialization of our Symphony platform. Derivative Warrant Liability Gain (Loss) Derivative warrant liability gain (loss) increased by approximately $52,000, or 123%, for the year ended December 31, 2021 as compared to the same period of 2020, resulting from the revaluation of the Series B Warrants accounted for as liability until their reclassification into equity in June 2021. Interest Expense, Net of Amortization of Premium Interest expense increased by approximately $340,000, or 1,261%, for the year ended December 31, 2021 as compared to the same period of 2020. The increase was primarily related to the amortization of discount and accrued interest on the Convertible Debentures issued in 2021 totaling approximately $266,000 and $125,000, respectively. This was partially offset by the lower interest expense recognized on the note payable issued in 2017 of $51,000 and increased premium amortization on the note payable issued in 2017 of approximately $29,000 driven by the conversion of those notes payable into common stock. Grant Income Grant income increased by approximately $75,000, or 100%, for the year ended December 31, 2021 as compared to the same period of 2020. The increase was due to a $75,000 grant received from Massachusetts Growth Capital Corporation Liquidity and Capital Resources Since our inception, we have financed our operations primarily through proceeds from our IPO, debt financings, private placements, interest income earned on cash, and cash equivalents, and grants. At December 31, 2021, we had cash and cash equivalents of approximately $19.0 million. As of February 28, 2022 , we had cash and cash equivalents of approximately $18.0 million. Primary Sources of and Uses of Cash The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented. Years Ended December 31, 2021 2020 Cash proceeds provided by (used in): Operating activities $ (4,366,758 ) $ (508,710 ) Investing activities (23,947 ) - Financing activities 22,526,122 1,325,060 Net increase in cash and cash equivalents $ 18,135,417 $ 816,350 37 Net cash used in operating activities During 2021, we used $4.4 million in cash for operating activities, an increase of $3.9 million, as compared to approximately $509,000 in 2020. The increase in the net cash used in operations was primarily due to approximately $500,000 increase in cash paid for personnel costs, approximately $600,000 increase in cash paid for certain design services for the Symphony machine, $240,000 increase in cash paid to Toray for licensing fees, and $1.6 million increase in cash spent on Directors and Officers insurance premiums due to our change from a private to a public company. Net cash used in investing activities During 2021, we used approximately $24,000 in cash for investing activities, a 100% increase from 2020. The increase in cash used in investing activities was primarily due to the purchase of lab equipment to support the development of the symphony product line. Net cash provided by financing activities During 2021, we generated $22.5 million in cash from financing activities, as compared to $1.3 million in 2020. The $21.2 million increase in cash generated from financing activities was primarily due to our initial public offering in November 2021, which provided net proceeds of $18.9 million. Additionally in 2021 we received $4.5 million from the issuance of convertible debentures, offset by issuance costs of approximately $563,000. Liquidity We believe that our available cash resources will be sufficient to fund our planned operations and capital expenditure requirements for at least twelve months from the date of this Annual Report on Form 10-K is filed with the SEC. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. However, our forecast is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Our future capital requirements will depend on many factors, including: ● the costs and timing associated with the development and commercialization of our Symphony analyzers and additional diagnostic tests; ● the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights; and ● the costs and any production constraints of our key contract manufacturers. As a result, we could deplete our available capital resources sooner than we currently expect. We expect to continue to incur net losses for the foreseeable future and believe we will need to raise substantial additional capital to accomplish our business plan over the next several years. In order to fund continued business development, to generate sales, to invest in further research and development and to otherwise satisfy obligations as they mature, we may need to seek additional financing equity and/or debt financing. Additional funding, however, may not be available to us on acceptable terms, or at all. If we are unable to access additional funds when needed, we will not be able to continue the development of our platform and our tests, or we could be required to delay, scale back or eliminate some or all of our research and development programs and other operations. Any additional equity financing, if available to us, may not be available on favorable terms, will most likely be dilutive to our current stockholders, and debt financing, if available, may involve restrictive covenants. Any of these events could harm our business, financial condition and prospects. 38 Recent Financings Series B Redeemable, Preferred Stock In 2020, we issued 456 shares of Series B redeemable, preferred stock (“Series B”) and 68 Series B warrants for gross proceeds of $50,000. Subordinated Notes On October 22, 2020, we issued $154,000 of 8% subordinated promissory notes (“Subordinated Notes”) to related party shareholders, as well as warrants to purchase 1,154,000 (prior to the stock dividend) shares of common stock at $0.10 per share, exercisable in cash or through cancellation of the notes. Series C Redeemable, Preferred Stock In November 2020, we issued 636 shares of Series C redeemable, convertible preferred stock (“Series C”) at a purchase price of $1,578.50 per share and received proceeds, net of issuance costs of approximately $995,000. Paycheck Protection Program Loan In 2020, we received loan proceeds of $116,000 from a Paycheck Protection Program loan (“PPP loan”). In November 2020, we received notice of forgiveness of $102,000 of principal of the PPP loan and, in February 2021, we received an adjustment which increased the forgiven balance by approximately $5,000 and repaid the $9,000 related to the unforgiven balance. Convertible Debentures On June 8, 2021, we entered into an agreement to issue a total of $4.5 million of 7.5% Senior Secured Convertible Debentures (the “Debentures”) to Sabby Volatility Master Fund, Ltd (“Sabby”), of which $3.0 million of the Debentures were issued at closing. The agreement provides for the purchase by Sabby of an additional $1.5 million of the Debentures after we file a registration statement for an initial public offering. On August 4, 2021 we issued an additional $1.5 million in principal amount of the Debentures to Sabby. Initial Public Offering We completed our initial public offering (“IPO”) on November 10, 2021 (“IPO Date”), whereby we sold 2,160,000 Units, each Unit consisting of one share of common stock, one warrant to purchase one share of common stock at an exercise price of $7.00 per share (“Class A Warrant”), and one warrant to purchase one share of common stock at an exercise price of $10.00 (“Class B Warrant”) (collectively, a “Unit”). Each Unit was sold at a price of $10.00. Each warrant contained within the Units is exercisable until the fifth anniversary of the IPO date. Additionally, the underwriter exercised its overallotment option to purchase 324,000 of Class A and Class B Warrants. The gross proceeds from the IPO were approximately $21.6 million. The offering costs related to the IPO were approximately $2.8 million. Indemnification We have certain agreements with service providers with which we do business that contain indemnification provisions pursuant to which we typically agree to indemnify the party against certain types of third-party claims. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. We would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As we have not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented. Critical Accounting Policies and Estimates Some of our critical accounting policies require us to make difficult, subjective or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. 39 As an emerging growth company, we have elected to opt-in to the extended transition period for new or revised accounting standards. As a result, our consolidated financial statements may not be comparable to those of companies that comply with public company effective dates. Stock-Based compensation Our stock-based compensation expense for stock awards is estimated at the grant date based on the award’s fair value as determined by the consideration received or as calculated by the Black-Scholes option pricing model, whichever is more readily measurable. The Black-Scholes pricing model requires various highly judgmental assumptions including expected volatility and expected term. The expected volatility is based on the historical stock volatilities of several similar public companies over a period equal to the expected terms of the awards as we do not have a sufficient trading history to use the volatility of our own common stock. To estimate the expected term, we have opted to use the simplified method, which uses of the midpoint of the vesting term and the contractual term. The Company recognizes the compensation cost of share-based awards on a straight-line basis over the requisite service period, however, for stock awards for which vesting is subject to performance – based milestones, the expense is recorded over the implied service period after the point when the achievement of the milestone is probable, or the performance condition has been achieved. If any of the assumptions used in the Black-Scholes pricing model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period Recently Adopted Accounting Standards In August 2020, FASB issued 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for public companies for fiscal years beginning on or after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company elected to adopt early this guidance in the first quarter of 2021. The adoption of this standard had no material impact on the Company’s consolidated financial statements. Recently Issued Accounting Standards In May 2021, the FASB issued ASU 2021-04 Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) . The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early application is permitted, including in an interim period as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the adoption date of this ASU and the impact, if any, adoption will have on its financial position and results of operations. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 , Leases. The new guidance requires the recognition of lease liabilities, representing future minimum lease payments, on a discounted basis, and corresponding right-of-use assets on a balance sheet for most leases, along with requirements for enhanced disclosures to give financial statement users the ability to assess the amount, timing, and uncertainty of cash flows arising from leasing arrangements. We adopted the provisions of ASU 2016-02 on January 1, 2022 and elected to implement the transition package of practical expedients permitted within the new standard, which included (i) not reassessing whether expired or existing contract contain leases, (ii) not reassessing lease classification, and (iii) not revaluing initial direct costs for existing leases. Adoption of the new standard resulted in the recording of initial right-of-use assets and lease liabilities of approximately $200,000 as of January 1, 2022. The new standard did not materially impact our consolidated statements of operations or cash flows. 40 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information requested by this Item is not applicable as we are electing scaled disclosure requirements available to Smaller Reporting Companies with respect to this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements and The Report of Independent Registered Public Accounting Firm are included in this Annual Report on Form 10-K on pages F-1 through F-22. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.