CIRCLE8 GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022, and related notes included elsewhere in this filing. This discussion and analysis and other parts of this filing contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this filing. You should carefully read the “Risk Factors” section of this filing to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this filing. Overview This overview and outlook provide a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report. About SeqLL We are a development-stage life sciences instrumentation and research services company engaged in the development of scientific assets and novel intellectual property across multiple “omics” fields. We leverage our expertise with True Single Molecule Sequencing (tSMS) technology enabling researchers and clinicians to contribute major advancements to scientific research and development. Our customers are primarily the early adopters of genomics technology and tSMS in academic research, biomarker discovery, and molecular diagnostic product development. Since our incorporation in 2014, we have devoted the majority of our efforts to technology development, business planning, and advancing research collaborations. We incurred net losses of $994,915 and $252,303 for the three months ended June 30, 2022 and 2021, respectively, and net losses of 1,932,869 and 1,666,921 for the six months ended June 30, 2022 and 2021 respectively. We had negative cash flow from operating activities of $2,013,997 and $181,408 for the six months ended June 30, 2022 and 2021, respectively, and had an accumulated deficit of $16,346,720 as of June 30, 2022. Results of operations may be adversely affected by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, inflation, increases in interest rates, the ongoing effects of the COVID-19 pandemic, including resurgences and the emergence of new variants, and geopolitical instability, such as the military conflict in the Ukraine. We cannot at this time fully predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively impact our business. Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto within the Consolidated Financial Statements section of this report, and trends discussed in “Risk Factors” in Item 1-A of Part II of this report. 16 Results of Operations Comparison of the Three Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021: Three months ended June 30, 2022 2021 Revenue Sales $ 1,177 $ 5,984 Grant revenue 30,000 57,412 Total revenue 31,177 63,396 Cost of sales 690 12,792 Gross profit 30,487 50,604 Operating expenses Research and development 365,845 24,461 General and administrative 625,739 425,234 Total operating expenses 991,584 449,695 Operating loss (961,097 ) (399,091 ) Other (income) and expenses Other income (5,748 ) (190,100 ) Change in fair value of convertible notes - 2,186 Interest expense 39,566 41,126 Net loss $ (994,915 ) $ (252,303 ) Revenues Our revenues during the three months ended June 30, 2022 were $31,177 as compared to revenues of $63,396 during the three-month period ended June 30, 2021, representing a decrease of $32,219, or 51%. During the three months ended June 30, 2022, revenue included grants of $30,000, $1,777 of revenues from product sales, and no sales from research services as compared to revenue in the same period of 2021 with no product sales, grants of $57,412 and $5,984 in research services. The decrease in revenue was due to the reduction in research services and business activities due to our relocation to Billerica, Massachusetts. This relocation resulted in our temporarily not having facilities that were sufficient to perform our research services and business activities. We expect to resume normal operations in the second half of 2022. In addition, grant revenue declined by 48% over the prior period due primarily to 2022 being the final year of the award. Gross Profit Gross profit for the three months ended June 30, 2022 was $30,487, as compared to gross profit of $50,604 for the three months ended June 30, 2021, which represented a 40% decrease primarily due to the fact that we had immaterial sales of products or services during the three months ended June 30, 2022 due to our relocation to Billerica, Massachusetts. Research and Development Expenses Research and development expenses increased by $341,384, or 1,396%, from $24,461 for the three months ended June 30, 2021 compared to $365,845 for the three months ended June 30, 2022. The increase in expenses was a result of our progressive return to research and development activities to levels of pre-COVID-19 pandemic. We expect these expenditures to increase over 2022 and beyond as we increase our research and development efforts to pre-pandemic levels. 17 General and Administrative Expenses General and administrative expenses increased by $200,505, or 47%, from $425,234 for the three months ended June 30, 2021 compared to $625,739 for the three months ended June 30, 2022. The increase was primarily attributable to increased operating expenses as a public company, including the addition of accounting, legal and audit related expenses, as well as approximately $200,000 related to increased payroll expense. General and administrative expenditures will continue to increase during 2022 to support ongoing financial reporting and compliance activities. Interest and Other Income/Loss We recognized interest expense of $39,566 and $41,126 in the three months ended June 30, 2022 and 2021, respectively, representing a decrease of $1,560, or 4%. The decrease in interest expense was due to a decrease in our outstanding indebtedness as a result of the conversion of $2.1 million in notes to equity concurrently with the consummation of our initial public offering on August 31, 2021. We recognized $2,186 related to the change in fair value of our convertible notes in the three-month period ended June 30, 2021. No such convertible notes were in existence for the three-month period ended June 30, 2022. We recognized $5,748 of interest income in the three-month period ended June 30, 2022. No such income was noted for the three-month period ended June 30, 2021. In the three-month period ended June 30, 2021, we recognized $190,100 from the receipt of funds in connection with the Paycheck Protection Program (“PPP”) pursuant to the CARES Act that was signed into law on March 27, 2020 . No such receipt was noted for the three-month period ended June 30, 2022. Net Loss Overall, the net loss increased by $742,612, or 294%, to $994,915 as compared to $252,303 for the three months ended June 30, 2021. The increase in expenses was a result of our progressive return to research and development activities to levels of pre-COVID-19 pandemic as well as the other income in connection with the PPP loan during the three months ended June 30, 2021. Comparison of the Six Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021: Six months ended June 30, 2022 2021 Revenue Sales $ 1,177 $ 32,084 Grant revenue 77,482 92,045 Total revenue 78,659 124,129 Cost of sales 690 40,743 Gross profit 77,969 83,386 Operating expenses Research and development 700,515 42,416 General and administrative 1,210,611 812,621 Total operating expenses 1,911,126 855,037 Operating loss (1,833,157 ) (771,651 ) Other (income) and expenses Unrealized gain on marketable securities (54,508 ) - Realized loss on marketable securities 106,324 - Other income (8,476 ) (190,100 ) Change in fair value of convertible notes - 2,186 Loss on extinguishment of convertible notes - 934,257 Interest expense 56,372 148,927 Net loss $ (1,932,869 ) $ (1,666,921 ) 18 Revenues Our revenues during the six months ended June 30, 2022, were $78,659 as compared to revenues of $124,129 during the six months ended June 30, 2021, representing a decrease of $45,470, or 37%. During the six months ended June 30, 2022, revenue included grants of $77,482 and $1,777 of revenues from product sales, and no sales from research services as compared to revenue in the same period of 2021 from product sales of $15,600, grants of $92,045 and $16,484 in research services. The decrease in revenue was due to the reduction in research services and business activities due to our relocation to Billerica, Massachusetts. This relocation resulted in our temporarily not having facilities that were sufficient to perform our research services and business activities. We expect to resume normal operations in the second half of 2022. In addition, grant revenue declined by 16% over the prior period due primarily to 2022 being the final year of the award. Gross Profit Gross profit for the six months ended June 30, 2022 was $77,969, as compared to gross profit of $83,386 for the six months ended June 30, 2021, which represented a 6% decrease primarily due to the fact that we had immaterial sales in 2022 due to our relocation to Billerica, Massachusetts as well as decreased grant revenue for the period ended June 30, 2022. Research and Development Expenses Research and development expenses increased by $658,099, or 1,552%, from $42,416 for the six months ended June 30, 2021 compared to $700,515 for the six months ended June 30, 2022. The increase in expenses was a result of our progressive return to research and development activities to levels of pre-COVID-19 pandemic. We expect these expenditures to increase over 2022 and beyond as we increase our research and development efforts to pre-pandemic levels. General and Administrative Expenses General and administrative expenses increased by $397,990, or 49%, from $812,621 for the six months ended June 30, 2021 compared to $1,210,611 for the six months ended June 30, 2022. The increase was primarily attributable to increased operating expenses as a public company, including the addition of accounting, legal and audit related expenses, as well as approximately $400,000 related to increased payroll expense. General and administrative expenditures will continue to increase during 2022 to support ongoing financial reporting and compliance activities. Interest and Other Income/Loss We recognized interest expense of $56,372 and $148,927 in the six months ended June 30, 2022 and 2021, respectively, representing a decrease of $92,555, or 62%. The decrease in interest expense was due to a decrease in our outstanding indebtedness as a result of the conversion of $2.1 million in notes to equity concurrently with the consummation of our initial public offering on August 31, 2021. We recognized $51,816 in net realized and unrealized losses on the marketable securities during the six months ended June 30, 2022. We did not hold such investments during the six months ended June 30, 2021. We recognized $2,186 related to the change in fair value of our convertible notes in the six months ended June 30, 2021. No such convertible notes were in existence for the six months ended June 30, 2022. We recognized $8,476 of interest income in the six-month period ended June 30, 2022. No such income was noted for the six-month period ended June 30, 2021. In the six-month period ended June 30, 2021, we recognized $190,100 from the receipt of funds in connection with the PPP pursuant to the CARES Act that was signed into law on March 27, 2020 . No such receipt was noted for the six-month period ended June 30, 2022. 19 We recognized a loss on extinguishment of debt totaling $934,257 in the six-month period ended June 30, 2021 related to certain convertible notes. The loss on the extinguishment of debt represented the excess of the fair value of these convertible notes totaling $3,075,987 over their carrying value of $2,141,730 at their amendment date in the first quarter of 2021. We did not incur such losses during the six months ended June 30, 2022. Net Loss Overall, the net loss increased by $265,948, or 16%, to $1,932,869 as compared to $1,666,921 for the six months ended June 30, 2021. This increase is primarily attributable to increased operating expenses as a public company and our progressive return to research and development activities to levels of pre-COVID-19 pandemic and our net realized and unrealized losses of $51,816. This increase in operating expenses was offset by our loss on extinguishment of our convertible notes in the six months ended June 30, 2021 in the amount of $934,257. No such loss occurred during the period ended June 30, 2022. Liquidity and Capital Resources The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Even though we experienced negative cash flows from operations of $2,013,997 for the six months ended June 30, 2022, as a result of our recent common stock offering in August 2021, we had cash and cash equivalents of $7,853,906 at June 30, 2022. Therefore, we estimate that our available cash resources will be sufficient to fund our operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the SEC. As of June 30, 2022, we had approximately $7.9 million in cash and cash equivalents. Cash and cash equivalents increased $3.8 million at June 30, 2022 as compared to December 31, 2021 due to the sale of approximately $5.9 million in our marketable securities, offset by the cash spending for operating activities for the six-month period ended June 30, 2022. Since inception, we have funded our operations primarily through equity and debt financings, as well as from modest sales of products and research services. As of June 30, 2022, we had an accumulated deficit of $16,346,720. In August 2021, we issued 3,060,000 shares of common stock to investors in our initial public offering. The gross proceeds from our initial public offering was $13.0 million. We incurred offering expenses of $1.6 million in cash. We also converted $2.1 million of debt into 641,895 shares of common stock at our initial public offering. On September 29, 2021, we issued 189,000 shares of common stock to the underwriters at a price of $4.24 per share from the partial exercise of the overallotment option, increasing the net proceeds by approximately $730,000, net of offering costs. We believe the net proceeds from our initial public offering, together with our cash generated from commercial sales and research activity, will enable us to fund our operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the SEC. However, our forecast of the period of time through which our financial resources will be adequate to support our operations 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: ● our ability to successfully further develop our technologies and create innovative products in our markets, including the costs associated with the development of our tSMS platform across multiple market segments, for which we have budgeted approximately $1 million in 2022 and $2 million in 2023 in support of our collaborative efforts in detection tools for heart disease and cancer, and chromatin mapping in genome biology; 20 ● scientific progress in research and development of our collaborative programs, including the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights, as well as the costs associated with any product or technology that we may in-license or acquire; and ● the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; including the need to enter into other collaborations to enhance or complement our product and service offerings. We plan to continue seeking additional financing sources from time to time to meet our working capital requirements, make continued investment in research and development and make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. In addition, if we raise additional funds through further issuances of equity or debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Cash Flows The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented. Six Months Ended June 30, 2022 2021 Cash proceeds (used in) provided by: Operating activities $ (2,013,997 ) $ (181,408 ) Investing activities 5,852,775 (5,250 ) Financing activities - 250,000 Net increase in cash and cash equivalents $ 3,838,778 $ 63,342 Net cash used in operating activities Net cash used in operating activities was approximately $2 million and $0.18 million for the six months ended June 30, 2022 and 2021, respectively. The increase in operating spending was a result of our progressive return to research and development activities to levels of pre-COVID-19 pandemic. In addition, we experienced an increase in our general and administrative spending since we became a public company in August 2021. We anticipate our research and development efforts and on-going general and administrative costs will generate negative cash flows from operating activities for the foreseeable future. Net cash used in investing activities Net cash provided by (used in) investing activities was approximately $5.9 million and less than $0.1 million for the six months ended June 30, 2022 and 2021, respectively. The increase was primarily attributable to our sales of our entire portfolio of marketable securities during the six-month period ended June 30, 2022. Net cash provided by financing activities Net cash provided by financing activities was $0 and approximately $0.25 million for the six months ended June 30, 2022 and 2021, respectively. We issued $250,000 in convertible notes during the six-month period ended June 30, 2021. There were no equity or debt issuances during the six months ended June 30, 2022. 21 Recent Accounting Pronouncements 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 the public companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We adopted this standard on January 1, 2022, which had no material impact to our condensed consolidated financial statements. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”) which establishes new accounting and disclosure requirements for leases. ASU No. 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. The Company adopted ASU 2016-02 in the first quarter of 2022 using the effective date approach to recognize and measure leases as of the adoption date. The Company has elected to utilize the available practical expedient to not separate lease components from non-lease components as well as the package of practical expedients that allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. At the date of adoption on January 1, 2022, this guidance had no impact to our condensed consolidated financial statements. We do not believe that any other recently issued but not yet effective accounting pronouncements are expected to have a material effect on our consolidated financial statements. Critical Accounting Policies and Estimates We prepare our financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect reported amounts. Estimations are considered critical accounting estimates based on, among other things, its impact on the portrayal of our financial condition, results of operations, or liquidity, as well as the degree of difficulty, subjectivity, and complexity in its deployment. Critical accounting estimates address accounting matters that are inherently uncertain due to unknown future resolution of such matters. Management routinely discusses the development, selection, and disclosure of each critical accounting estimates. Other than those noted within Note 2 to our unaudited consolidated financial statements, there have been no significant changes to our critical accounting policies and estimates during the three- and six-month periods ended June 30, 2022 as compared to the information contained in our 2021 Form 10-K filed with the SEC. Reference should be made to the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 for a full description of other significant accounting policies. 22 JOBS Act Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. For as long as we remain an emerging growth company under the recently-enacted JOBS Act, we will, among other things: ● be permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure; ● be entitled to rely on an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; ● be entitled to reduced disclosure obligations about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and ● be exempt from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required under Regulation S-K for smaller reporting companies.