AEROCLEAN TECHNOLOGIES, INC. Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)
The following discussion and analysis should be read in conjunction with the historical condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report") as well as our audited financial statements for the fiscal year ended
December 31, 2020included in our offering circular filed with the SECpursuant to Rule 253(g)(1) promulgated under the Securities Act on November 24, 2021. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" appearing elsewhere in this Quarterly Report. Overview AeroCleanis an interior space air purification technology company. Our immediate objective is to initiate full-scale commercialization of our high-performance interior air sterilization and disinfection products for the eradication of harmful airborne pathogens, including COVID-19. We were established to develop unmatched, technology-driven medical-grade air purification solutions for hospitals and other healthcare settings. The onset of the COVID-19 global pandemic underscores the urgency of bringing to market air purification solutions to protect front-line healthcare workers, patients and the general population. We incorporate our proprietary, patented UV-C LED technology in equipment and devices to protect the occupants of interior spaces. These spaces include hospital and non-hospital healthcare facilities (such as outpatient chemotherapy and other infusion facilities and senior living centers and nursing homes), schools and universities, commercial properties and other indoor spaces. Our products are being designed and engineered to exceed the rigorous standards set by the FDA for interior air sterilization and disinfection products. Our units can be marketed for use pursuant to the FDA Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers during the Coronavirus Disease 2019 (COVID-19) Public Health Emergency. We are currently seeking FDA 510K clearance for the use of our products in healthcare and other markets for which product performance is required to be validated by certified independent labs. Regulatory clearances and independent certifications serve as important product imprimaturs that also influence decision-making by non-healthcare market equipment purchasers. We expect to receive FDA 510K clearance for Pūrgo in the second half of 2022. We are currently initiating the full-scale launch of our first product, Pūrgo. Pūrgo is our proprietary, continuous air sanitization product for indoor spaces. Pūrgo's launch also marks the debut of our go-to-market strategy for SteriDuct, the Company's patented air purification technology. We intend to incorporate SteriDuct into a broad line of autonomous air treatment devices. Pūrgo has been well-received by the market. We are fielding broad interest from healthcare organizations, particularly those that treat numerous immunocompromised patients, our initial targeted market, as well as from schools and universities. We are also receiving urgent inquiries from owners and managers of commercial properties and other indoor spaces, and we are developing solutions for public and private transportation systems.
To support the transition to commercial operations, in
July 2021, we also completed the build out of our corporate headquarters in Palm Beach Gardens, Florida, which includes our warehouse and distribution facility, as well as the site for our future service operations. 11 COVID-19 Pandemic
We continue to monitor the outbreak of COVID-19 and its variants, including the most recent Omicron variant, which continue to spread throughout the world and adversely impact global commercial activity and contribute to significant declines and volatility in financial markets. Our on-going research and development activities, including development of product prototypes and manufacturing activities, are all conducted in
the United States, and as a result, we have been able to mitigate the adverse impact of the COVID-19 pandemic on our global supply chain. During 2020 and through of this Quarterly Report, we have not experienced any significant adverse impact on our operations and do not expect any significant disruptions in the near term. We continue to actively monitor the situation and may take further actions that impact operations as may be required by federal, state or local authorities or that we determine is in the best interests of our employees, customers, suppliers and stockholders. As of the date of this Quarterly Report, the pandemic presents uncertainty and risk as we cannot reasonably determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources. Results of Operations The following table summarizes our results of operations for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Change 2021 2020 Change Product revenues $ 261,299$ - $ 261,299 $ 261,299$ - $ 261,299Cost of sales 147,733 - 147,733 147,733 - 147,733 Gross profit 113,566 - 113,566 113,566 - 113,566 Operating Expenses: General and administrative 685,079 484,442 200,637 2,678,689 625,812 2,052,877 Research and development 956,499 812,950 143,549 3,617,101 1,057,265 2,559,836 Total operating expenses 1,641,578 1,297,392 344,186 6,295,790 1,683,077 4,612,713 Net Loss $ (1,528,012 ) $ (1,297,392 ) $ (230,620 ) $ (6,182,224 ) $ (1,683,077 ) $ (4,499,147 )
Comparison of the completed three and nine months
Revenues and Cost of Sales
The Company began the production and sale of its first commercial product, Pūrgo, in
July 2021generating $261,299in product revenues for the three and nine months ended September 30, 2021on sales of over 100 Pūrgo devices. The Company did not have any revenue in the prior year periods. Cost of sales increased in conjunction with the increase in revenues. Operating Expenses
General and administrative expenses
General and administrative expenses consist primarily of costs related to our employees, independent contractors and consultants. Other significant general and administrative expenses include accounting and legal services and expenses associated with obtaining and maintaining patents as well as marketing and advertising services and expenses associated with establishing our brand and developing our website, marketing materials and call center. For the three months ended
September 30, 2021and 2020, we incurred $685,079and $448,442, respectively, of general and administrative expenses. We attribute the increase of $200,637primarily to a greater level of business activities being conducted in the three months ended September 30, 2021as compared to the same period in 2020, including costs related to the hiring of additional personnel and increased fees for outside consultants, and an increase in rent expense
$100,000. For the nine months ended September 30, 2021and 2020, we incurred $2,678,689and $625,812, respectively, of general and administrative expenses. We attribute the increase of $2,052,877primarily to a greater level of business activities being conducted in the nine months ended September 30, 2021as compared to the same period in 2020, including costs related to the hiring of additional personnel (increase of over $350,000), increased fees for outside consultants (over $900,000) and rent expense (increase of almost $300,000). 12
Research and development costs
Since our inception, we have focused our resources on our research and development activities. We expense research and development costs as they are incurred. Our research and development expenses primarily consist of outsourced engineering, product development and manufacturing design costs. For the three months ended
September 30, 2021and 2020, we incurred $956,499and $812,950, respectively, in research and development costs. For the nine months ended September 30, 2021and 2020, we incurred $3,617,101and $1,057,265, respectively, in research and development costs. Research and development expenses were relatively flat for three months ended September 30, 2021as compared to the prior year period while they increased $2,559,836for the nine months ended September 30, 2021as compared to the prior year period. We began to ramp up research and development activities in May of 2020 resulting in a lower rate of expenditures in the nine month September 30, 2020period as compared to the current year period. The three month periods were relatively flat as we had reached a normalized run rate of expenditures by the third quarter of fiscal 2020. Net Losses Our net losses were $1,528,012and $1,297,392for the three months ended September 30, 2021and 2020, respectively. Our net losses were $6,182,224and $1,683,077for the nine months ended September 30, 2021and 2020, respectively. Losses increased in fiscal 2021 as compared to fiscal 2020 for the reasons
set forth above.
Liquidity and capital resources
Sources of Liquidity As of
September 30, 2021, we had cash of $655,780compared to cash of $2,333,117as of December 31, 2020. From January 1, 2021through September 30, 2021, we raised an additional approximately $5,100,000in gross proceeds from the sale of our Class A units and we issued an additional approximately $900,000of our Class A units to our independent contractors and Board members for services rendered. On September 30, 2021, we borrowed $500,000, and on November 5, 2021, we borrowed an additional $500,000pursuant to bridge loans (collectively, the "Bridge Loans") from our Chairman at an interest rate of the prime rate plus 3.0% per annum, 6.25% for the life of the Bridge Loans, with the principal and accrued interest due upon demand. On November 29, 2021, the Company completed a public offering (the "Public Offering") of 2,514,000 shares of its common stock, which included the partial exercise of the underwriters' overallotment option, at a public offering price of $10.00per share for aggregate gross proceeds of $25,140,000and net proceeds of approximately $22,000,000after deducting underwriting fees and closing costs of approximately $3,100,000. We repaid the Bridge Loans and accrued interest on December 1, 2021with a portion of the net proceeds from the Public Offering.
Before the public offer, we financed our operations mainly with around
We have incurred operating losses since our inception. While the Company began producing and selling its Pūrgo device in
July 2021, these losses are expected to continue through the end of 2022 as we continue to make significant investments to develop and market our products and to establish our consumables and service business.
We believe that our cash balances at
Future financing needs and outlook
We have incurred operating losses each year since our inception. These losses are expected to continue through the end of 2022 because we plan to continue to make significant investments to develop and market our products and to establish our consumables and service business. We also expect to incur increased costs to comply with corporate governance, internal controls and similar requirements applicable to public companies. On
September 30, 2021, we borrowed $500,000, and on November 5, 2021, we borrowed an additional $500,000pursuant to the Bridge Loans from our Chairman at an interest rate of the prime rate plus 3.0% per annum, 6.25% for the life of the Bridge Loans, with the principal and accrued interest due upon demand. We repaid the Bridge Loans and accrued interest on December 1, 2021with a portion of the net proceeds from the Public Offering. Based on our current financial resources, our expected revenues and our expected level of operating expenditures, we believe that we will be able to fund our projected operating requirements for at least the next 12 months. We may also finance our cash needs through debt and equity offerings. To the extent that we raise additional capital through the sale of equity or convertible debt or equity securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. 13
Off-balance sheet provisions
Lease Commitments - On
February 1, 2021, the Company entered into a lease with Gardens Bio Science Partners, LLC, an entity under common control of the Company's co-founder and Chairman of the Board. The leased premises consist of 20,000 square feet of office and warehouse space and has a lease term of 10 years at an annual base rent of $260,000subject to escalation of 2.5% on an annual basis. As of September 30, 2021, the future minimum lease payments under this arrangement approximated $2,740,000. Indemnities, Commitments and Guarantees - Effective November 1, 2020, the Company executed employment agreements with two key members of management that will continue until terminated by either party. In the event of termination without cause, the Company is obligated to pay the executive their base salary for a period of six months. Further, in the event of termination without cause or resignation for good reason, or a change of control, each as defined in the agreements, within twelve months of such termination or resignation, each of the executives is entitled to accelerated vesting of any outstanding time-based equity awards. The employment agreements provide for a base salary and a discretionary annual bonus to be determined at the sole discretion of the Board. The Company's employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance under certain circumstances in the event of a change of control. On May 1, 2021, the employment agreements were amended to provide for the eligibility of each executive to receive restricted stock units upon the conversion of the Company to a Delawarecorporation, which occurred in connection with the consummation of the Public Offering. The Company also had agreements in place with independent contractors whereby the Company was required to compensate the independent contractors fifty percent in cash and fifty percent in equity. The equity consideration was contingent upon future events, including the conversion to a Delawarecorporation and a new round of equity financing from third party sources, which were not deemed to be probable at December 31, 2020. Subsequent to December 31, 2020, these agreements were amended so that the compensation will be in cash only for services provided subsequent to March 31, 2021. Effective April 1, 2021, the contractors were issued Class A Units to compensate them for the fifty percent equity portion of their consideration earned. See Note 9, Members' Equity to the condensed financial statements. Inflation
We do not believe that inflation or price changes will have a material effect on our business.
Critical accounting conventions and estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which we have prepared in accordance with accounting principles generally accepted in
the United States of America(GAAP). The preparation of the financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We evaluate these estimates, judgments and methodologies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Our actual results could differ from those estimates. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies to our audited financial statements included in our offering circular filed with the SECpursuant to Rule 253(g)(1) promulgated under the Securities Act on November 24, 2021. We believe that the accounting policies are critical for fully understanding and evaluating our financial condition and results of operations. 14 JOBS Act On April 5, 2012, the JOBS Act, was enacted. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as public companies that are not emerging growth companies. As a result of this election, our financial statements may not be comparable to companies that are not emerging growth companies. We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company," we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an "emerging growth company" until the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billionor more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of the Public Offering; (iii) the date on which we have issued more than $1 billionin non-convertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information to investors. This Quarterly Report includes forward-looking statements that reflect our current expectations and projections about our future results, performance and prospects. Forward-looking statements include all statements that are not historical in nature or are not current facts. When used in this Quarterly Report, the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "might," "should," "could," "will" or the negative of these terms or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause our actual results, performance and prospects to differ materially from those expressed in, or implied by, these forward-looking statements. Factors that might cause such a difference include those discussed in our filings with the
SEC, in particular those discussed under the heading "Risk Factors" in our offering circular filed with the SECon November 24, 2021and in this Quarterly Report, including the following factors:
• planned schedule of product launches;
• expectations regarding the potential market reception and performance of our products;
• limited operating history;
• ability to manage growth;
• ability to obtain additional funding when needed;
• ability to expand the product offering;
• ability to compete with others in our industry;
• results of operations;
• ability to protect our intellectual property;
• ability to defend against legal action; and
• the success of retention or recruitment, or required changes in our officers, key employees or directors.
In light of these risks and uncertainties, you are cautioned not to put undue reliance on any forward-looking statements in this Quarterly Report. These statements should be considered only after carefully reading this entire Quarterly Report. Except as required under the federal securities laws and rules and regulations of the
SEC, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Quarterly Report not to occur.
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