UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

FORM 1-SA

For the fiscal semiannual period ended June 30, 2021

Cytonics Corp 

(Exact name of issuer as specified in its charter)

(561) 406-2864 

(Issuer’s telephone number, including area code)

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This semi-annual report on Form 1-SA of Cytonics Corp, a Florida corporation, contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth or anticipated in our forward-looking statements.

When considering forward-looking statements, you should keep in mind the foregoing risk factors and other cautionary statements in this report. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this report. The matters summarized below and elsewhere in this report could cause our actual results and performance to differ materially from those set forth or anticipated in forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise.

Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context otherwise requires or indicates, references in this Semi-Annual Report on Form 1-SA to “us,” “we,” “our”, “ours” or the “Company” refer to Cytonics Corp, a Florida corporation. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Semi-Annual report.

General

Cytonics Corp (the “Company”) was formed on July 19, 2006 as a Florida corporation, under the name Gamma Spine, Inc. and was renamed Cytonics Corporation on April 17, 2007. The Company was formed for the purpose of researching and developing, marketing and distributing analytic tools used to detect biomarkers associated with certain diseases referred to as “assays,” therapeutic drugs, and related instruments and disposables related to musculoskeletal diseases. We are a development stage research company dedicated to developing therapeutics based on the naturally-occurring protease inhibitor alpha-2-macroglobulin (A2M), a blood serum protein that has known cartilage-protecting effects and could potentially serve as a treatment for osteoarthritis. To this end, we have developed a number of diagnostic and therapeutic products aimed at treating joint pain and inflammation.

Our mission is to improve people’s lives by limiting the progression of chondral pathology, which is bone and cartilage degeneration, which leads to disabling pain, inflammation, and the development of arthritis. Our strategy has been to leverage the unique molecular characteristics of A2M to develop autologous (“self-derived”) and synthetic (manufactured in a laboratory) therapeutics. We have developed two autologous A2M therapies and have out-licensed the drugs to medical device distributors in the human and veterinary orthopedic markets. Our current focus is on the development of a synthetic A2M variant (“CYT-108”) that can be synthesized in a laboratory and purchased “off-the-shelf,” and can be delivered in high concentrations to damaged and inflamed joints by an orthopedist. We seek to maximize the value of the drugs we discover by putting them in the hands of leading pharmaceutical companies with late-stage development, commercialization and marketing expertise.

For the semi-annual periods ended June 30, 2021 and 2020, we generated revenues of $202,500 and $461,056, respectively, and reported net losses of $1,173,984 and $90,934, respectively, and negative cash flow from operating activities of $1,495,513 and $227,899, respectively. As noted in our financial statements, we had an accumulated stockholders’ deficit of approximately $2,572,034 and recurring losses from operations as of June 30, 2021.

Results of Operations

The following discussion of results of operations refers to the semi-annual period ended June 30, 2021 compared to June 30, 2020.

Revenue

Our revenue, net for the semi-annual period ended June 30, 2021 was $202,500 compared to $461,056 for June 30, 2020. This decrease in revenue was due to the large, upfront license acquisition fees due in 2020 which decreased in 2021.

Cost of Goods Sold

Cost of goods sold primarily consists of materials and freight costs. Considering that Cytonics does not source raw materials, manufacture, or distribute any of its proprietary products, Cost of Goods Sold is not relevant.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses totaled $561,610 and $51,892 for the semi-annual period ended June 30, 2021 and 2020, respectively. Excluded in these expenses were payroll and related expenses of $151,946 and $164,151 during semi-annual period ended June 30, 2021 and 2020, respectively. Included in our payroll and related expenses are charges for stock-based compensation totaling $33,248 and $888,899 semi-annual period ended June 30, 2021 and 2020. At June 30, 2021, there was approximately $55.094 of unrecognized compensation costs related to stock options outstanding which will be recognized through 2024.  The Company will recognize forfeitures as they occur. Professional fees totaled $108,657 and $86,393 during the semi-annual period ended June 30, 2021 and 2020, respectively. These expenses included legal, accounting and auditing expenses.

Research and Development Expenses

Research and development expenses totaled $884,418 and $180,625 for the semi-annual period ended June 30, 2021 and 2020, respectively. The decrease in the research and development expenses was attributable to amortizing the research and development fees.

Interest Income and Expense

Interest income totaled $7,166 and $1,824 for the semi-annual period ended June 30, 2021 and 2020. The increase in interest income was due to an increase in cash in an interest-bearing money market account. Interest expenses totaled $262,033 and $57,926 for the semi-annual period ended June 30, 2021 and 2020, respectively. This figure represents the interest paid on the Company’s outstanding convertible and promissory notes.

Net Loss

Net loss totaled $1,173,984 and $90,934 for the semi-annual period ended June 30, 2021 and 2020, respectively. Net noncash amounts included in our net loss were $429,127 and $102,726, for the semi-annual period ended June 30, 2021 and 2020 respectively. Non-cash amounts reflected stock-based compensation, amortization, including amortization of debt discounts, and loss on impairment of intangible assets.

Liquidity and Capital Resources

Liquidity

We have primarily financed our operations through the sale of unregistered equity, promissory notes and warrants.  As of June 30, 2021, our Company had cash totaling $2,247,257, current assets totaling $2,416,664, and total assets of $3,092,735. We had total liabilities of $520,701, all of which were current, and positive working capital of $1,895,963. Stockholders’ equity totaled $2,572,034.

Sources and Uses of Cash for the Semi-Annual Period ended June 30, 2021 and 2020

The following table summarizes our cash flows for the semi-annual period ended June 30, 2021 and 2020.

Net cash used by operating activities was $1,495,513 and $227,899 for the semi-annual period ended June 30, 2021 and 2020, respectively.  The increase in net cash used by operating activities was related to research and development expenses incurred in 2021.

Net cash used by investing activities was $46,107 and $60,715 for the semi-annual period ended June 30, 2021 and 2020, respectively. The net cash used for investing activities can be attributed to the purchase of intangible assets, namely the prosecution of our patent portfolio.

Net cash provided by financing activities totaled $2,251,523 and $45,713 for the semi-annual period ended June 30, 2021 and 2020, respectively. The net cash provided by financing activities for the semi-annual period ended June 30, 2021 were primarily from equity crowdfunding. The net cash provided by financing activities for the semi-annual period ended June 30, 2020 was primarily attributed to the paycheck protection loan program.

Availability of Additional Funds

Our capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or exceed our ongoing operating expenses.  Other than the borrowings from related and third parties, we do not have any credit agreement or source of liquidity immediately available to us.

Since inception our operations have primarily been funded through proceeds from existing shareholders in exchange for equity and debt.

Although we believe that we have access to capital resources, there are no commitments in place for new financing and there can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. We expect to have ongoing needs for working capital in order to (a) fund operations; plus (b) research and development. To that end, we may be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund its liabilities, or (d) seek protection from creditors.

In addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company.

If we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. We may seek to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.

On July 6, 2020, the Company began its offering up to 9,500,000 shares of its Series C Preferred Stock in a “Tier 2 Offering” under Regulation A (“the “Reg A Offering”). The price per share of Series C Preferred Stock was $2.00 per share. The Series C Preferred Stock shares are convertible into shares of the Company’s common stock either at the discretion of the investor or automatically upon the occurrence of the consummation of an underwritten public offering of the Company resulting in at least $20,000,000 net proceeds to the Company. The total number of shares of the Common Stock into which the Series C Preferred Stock may be converted at the discretion of the investor is based on a conversion ratio of 1 for 1. The Company raised $4,659,638 funds in its Reg A Offering and issued 2,329,819 shares of its Series C Preferred Stock to 2,557 investors. The Reg A Offering was closed on April 30, 2021.

The Company is currently engaged in a Regulation Crowdfunding Offering of up to $5,000,000 worth of its Series C Preferred Stock for a price of $2.30 per share (the “Reg CF Offering”). The Company closed the Reg CF Offering on October 14, 2022, and the Company raised approximately $2,730,185 during the offering period in the Reg CF Offering.

The Company is currently engaged in its second Regulation Crowdfunding Offering of 2022 of up to $1,951,219.51 worth of its Series C Preferred Stock for a price of $2.30 per share (the “Second 2022 Reg CF Offering”).

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Critical Accounting Policies Involving Management Estimates and Assumptions

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).

During 2018, the Company affected a 2:1 split of its common stock. All shares of common stock have been adjusted to reflect post-split amounts for all periods presented.

Use of Estimates

To prepare financial statements in conformity with generally accepted accounting principles (“GAAP”), management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider currency on hand, demand deposits and all highly liquid investments with an original or remaining maturity of three months or less to be cash and cash equivalents. As of the semi-annual period ended June 30, 2021 and 2020, the Company had no cash equivalents.

Concentration of Credit Risk and Significant Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. During the semi-annual period ended June 30, 2021 and 2020, revenues were generated from two and three customers, respectively.

Accounts Receivable

Accounts receivable in the accompanying financial statements are stated at the amounts management expects to collect. The Company performs credit evaluations of its customers’ financial condition and may require a prepayment for a portion of the services to be performed. Management has determined that no allowance for uncollectible receivables is required at June 30, 2021 and 2020.

Intangible Assets

Intangible assets consist of costs paid to third parties for work related to the Company’s patents. The costs paid to third parties for the Companies’ assets are amortized using the straight-line method over the life of the underlying patents, which approximates 15 years. Intangible assets are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.

Revenue Recognition

Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of control or access of the company’s licenses or performance of services. Revenue is measured as the amount of consideration the company expects to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

Research and Development

Costs related to research and development are expensed as incurred and include costs associated with research and development of new products and enhancements to existing products. The amount of research and development costs for the semi-annual period ended June 30, 2021 and 2020, were $884,418 and $180,625, respectively.

Income Taxes

The Company uses the asset and liability method to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities.

Deferred tax assets and liabilities are determined using the effective tax rates for the years in which the tax assets and liabilities are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will be achieved. The Company recorded a full valuation allowance on its net deferred tax assets at June 30, 2021 and 2020.

Quantitative and Qualitative Disclosure about Market Risk

Trade Policy Risk

Substantially all of the Company's products are manufactured outside the United States. Most products imported into the United States is subject to duty and restrictive quotas on the amount of products that can be imported from certain countries into the United States each year. Because of the duty rates and quotas, changes in U.S. trade policy as reflected in various legislation, trade preference programs and trade agreements have the potential to materially impact the Company's sourcing strategy and the competitiveness of its contract manufacturers. The Company manages this risk by continually monitoring U.S. trade policy, analyzing the impact of changes in such policy and adjusting its manufacturing and sourcing strategy accordingly.

Foreign Currency Risk

The Company receives United States dollars for all of its product sales. Substantially all inventory purchases from our contract manufacturer are also denominated in United States dollars; however, purchase prices for the Company's products may be impacted by fluctuations in the exchange rate between the United States dollar and the local currencies of the contract manufacturer, which may have the effect of increasing the Company's cost of goods in the future. The Company does not engage in hedging activities with respect to such exchange rate risk.

Commodity Price Risk

The Company is subject to commodity price risk arising from price fluctuations in the market prices of sourced titanium and steel products or the various raw materials components of its manufactured products. The Company is subject to commodity price risk to the extent that any fluctuations in the market prices of its purchased titanium and steel products and raw materials are not reflected by adjustments in selling prices of its products or if such adjustments significantly trail changes in these costs. The Company neither enters into significant long-term sales contracts nor enters into significant long-term purchase contracts. The Company does not engage in hedging activities with respect to such risk.

Credit Risk

Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows.

Certain financial instruments potentially subject the company to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. We place our cash and cash equivalents with high-credit, quality financial institutions. The balances in these accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

Item 2. Other Information.

None.

Item 3. Financial Statements.

INDEX TO FINANCIAL STATEMENTS

Cytonics Corporation

Condensed Financial Statements

June 30, 2021 (Unaudited)

and

December 31, 2020 (Audited)

Table of Contents

Cytonics Corporation

Condensed Balance Sheets

June 30, 2021 and December 31, 2020

See accompanying notes to the condensed financial statements.

Cytonics Corporation

Condensed Statements of Operations

For the Six-Months Ended June 30, 2021 and 2020

See accompanying notes to the condensed financial statements.

Cytonics Corporation                                                

Condensed Statements of Changes in Stockholders' Equity (Deficit)                        

For the Six-Months Ended June 30, 2021 and 2020                                  

See accompanying notes to the condensed financial statements.

Cytonics Corporation      

Condensed Statements of Cash Flows      

For the Six-Months Ended June 30, 2021 and 2020      

See accompanying notes to the condensed financial statements.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 1 – Nature of Business

Cytonics Corporation (the “Company”) is a research and development company that develops therapies and diagnostics for back and joint pain, which it then licenses to unrelated third parties. The Company was incorporated in the State of Florida under the name Gamma Spine, Inc. on
July 19, 2006 and was renamed Cytonics Corporation on April 17, 2007.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements. The December 31, 2020 balance sheet has been derived from audited financial statements.

The accompanying unaudited condensed financial statements for the six months ended June 30, 2021 and 2020 have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

The unaudited financial information included in this report includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods. The results of operations for the six months ended June 30, 2021 and 2020 are not necessarily indicative of the results of the full fiscal year.

The condensed financial statements included in this report should be read in conjunction with the financial statements and notes thereto included in the Company’s financial statements for the fiscal year ended December 31, 2020.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying Notes. Actual results could differ materially from those estimates. The Company’s most significant estimates include the useful life of intangible assets, fair value of stock-based compensation and stock and warrants issued with convertible notes and notes payable.

Cash and Cash Equivalents

Cash includes cash deposited in major financial institutions, which at times may exceed Federal Deposit Insurance Corporation insurance limits.

The Company considers highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. As of June 30, 2021 and December 31, 2020 the Company had no cash equivalents.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Revenue Recognition

The Company recognizes revenue when obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of control or access of the Company’s licenses or performance of services. Revenue is measured as the amount of consideration the company expects to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

Contracts with customers consist of licensing arrangements and, to a lesser extent, research and development related services. Revenues from licensing and royalty fees are received from the granting of exclusive sales, marketing, manufacturing and distribution rights associated with the Company’s functional intellectual property (IP). The Company’s performance obligation is satisfied at a point in time (upon delivery to the customer), where the Company has no remaining obligation to support or maintain the intellectual property licensed to the customer. The Company typically requires a non-refundable license fee, paid over several years, and quarterly royalty payments based on a percentage of sales with minimum quarterly royalty guarantees. The Company applies a discount to license fees that represent earned revenues at the time of contract execution to be received over time.

Revenue from license fees are recognized at a point in time when the Company transfers the functional IP to the customer as long as management believes the total consideration owed by the customer for the license fee is probable of being received. Due to the financing component embedded in the license fee, the Company records the revenue and accounts receivable at its net present value using an estimated discount rate at the point in time the performance obligation associated with the license fee has been completed. Management applies a discount rate that reflects the customers’ creditworthiness and the amount that would have been received from the customer if the license fee was paid upon execution of the contract. The effects of the financial component is separately presented from revenue as interest income.

Minimum guaranteed royalty (MGRs) payments are not binding and are considered to be contingent on the customers’ ability to generate sales. The Company’s contracts include termination clauses for nonpayment by customers or mutual agreement. The termination clauses are likely to be triggered if the customer is unable to make the MGRs. The Company has historically made price concessions when needed by customers. Given the contractual nature of the MGRs and customary business practices, the Company recognizes revenue from MGRs pursuant to ASC 606-10-55-65, which requires recognition for a sales-based royalty promised in exchange for a license of intellectual property only when (or as) the later of the following events occurs:

The Company recognizes revenue from MGRs when they become due under the terms of the contract and the consideration has been received or is expected to be received.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Revenue Recognition, continued

License and royalties due under the contract not yet received have been reflected as accounts receivable on the balance sheets, net of any discounts

The Company also generates revenues for running diagnostic tests. The service is invoiced and the revenue is recognized upon completion of the test and after the test results are reported to the customer, which is at the point the Company has satisfied its performance obligation.

Except for the estimate of discount rate to be applied to license fees to be received over a period of years, the Company’s contracts do not include multiple performance obligations or variable consideration. Since the Company’s revenue is generated from a small number of customer contracts, the Company does not have material contract assets or liabilities.

During the year ended December 31, 2020, the Company received consideration from a customer in connection with the granting of exclusive sales, marketing, manufacturing and distribution rights associated with the Company’s functional intellectual property. Upon execution of the contract, the Company required a $450,000 nonrefundable license fee, payable in installments over a period of years through 2025 which management believes is probable of collecting. In the event the contract is terminated prior to its ten-year term, the customer is required to pay a portion of the license fee based on sliding scale and the year of termination. As of December 31, 2020 $400,000 of the nonrefundable fee remains due which has been presented on the balance sheets as an accounts receivable in the amount of $363,676, net of a $36,324 discount. As of June 30, 2021 $320,000 of the nonrefundable fee remains due which has been presented on the balance sheets as an accounts receivable in the amount of $307,435, net of a $12,565 discount.

During the six-months ended June 30, 2021 and 2020, the Company recognized revenue from license fees and MGRs of $202,500 and $455,056, respectively, which is presented on the statement of operations as license and royalty revenues.

During the six months ended and year ended June 30, 2021 and 2020, service revenues which are recognized at the completion of the service were $0 and $6,000, respectively as presented on the statement of operations.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Intangible Assets

The Company’s intangible assets include seven U.S. patents (US 10,265,388, US 11,040,092, US 10,940,189, US 9,352,021, US 9,498,514, US 10,400,028, US 10,889,631), three U.K. patents (GB2501611, GB2503131 and GB2522561), two European patents (EP 2827882 and EP 3221341; each of which are validated in FR, DE, and GB), one Canadian patent (CA 2865170), two Australian patents (AU 2013222414, AU 2015349782), and one Japanese patent (JP 6861152). The Company also has five additional related pending patents applications.  The cost of issued patents are capitalized and amortized over the life of the patents which is 20 years from the earliest filing date of the non-provisional or PCT application to which priority is claimed. The costs of patents in development are expensed as incurred.  The unamortized costs associated with previously capitalized patents that have expired or abandoned are written off.

The Company assesses potential impairments to its intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. During the six months ended and year ended June 30, 2021 and 2020, the Company had no impairment of intangible assets.

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities, and convertible notes approximate their fair values because of the short maturities and/or market interest of these financial instruments.

Extinguishment of Debt

The Company evaluates the settlement of debt transactions in accordance with ASC 405 Liabilities and ASC 470 Debt. If debt is converted or exchanged into issuer’s equity shares on terms different from those at issuance, the transaction is accounted for as a debt extinguishment with the difference between the carrying value of the debt and the fair value of equity shares being recorded in earnings as a gain or loss. At June 30, 2021, the Company had $571,826 of gain on extinguishment due to the conversion of convertible notes payable and notes payable (see Note 5).

Contingencies

The Company records contingent liabilities resulting from asserted and unasserted claims when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are disclosed when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. The process of estimating probable losses requires professional judgment in the analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Concentrations of Risk

In the normal course of business, the Company is potentially subject to concentrations of credit risk in its trade receivables. Although the Company is directly affected by the financial condition of its customers, management does not believe significant credit risks exist at June 30, 2021 and December 31, 2020. Generally, the Company does not require collateral or other securities to support its Trade Receivables.

Share-Based Payments

The Company measures the cost of services received in exchange for an award of equity instruments to employees and nonemployees based on the grant date fair value of the award, which is recognized as compensation expense over the vesting term.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that management believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that the Company would be able to realize deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

Recently Issued Accounting Standards

Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. The Company adopted the provisions of ASU No. 2016-15 in 2020, which did not have an impact on it’s cash flow presentation.

Accounting for Certain Financial Instruments with Down Round Features

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11).

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Recently Issued Accounting Standards, continued

Accounting for Certain Financial Instruments with Down Round Features, continued

Part I of ASU 2017-11 simplified the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise or conversion price based on the price of future equity offerings. Previous accounting guidance created cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option each reporting period.

ASU 2017-11 requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise or conversion price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will recognize the effect of the trigger within equity.

ASU 2017-11 is effective for public business entities for fiscal years beginning after
December 15, 2018, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.

The Company’s adoption of ASU 2017-11 related to financial instruments issued with down round features on January 1, 2020 did not have an impact on the Company’s financial condition or results of operations.

Accounting Standards Not Yet Adopted

On August 5, 2020, the FASB issued ASU 2020-06,1  (“ASU 2020”) which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP.  ASU 2020 is effective for fiscal years beginning after December 31, 2023. The Company feels the adoption of ASU 2020 will not have a material impact to the financial statements.

The amendments are effective for public business entities, that are not smaller reporting companies, in fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, in fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Subsequent Events

Management has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through November 18, 2022, the date these financial statements were available to be issued.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 3 –Going Concern

As shown in the accompanying financial statements, during the year ended June 30, 2021 the Company has sustained a net loss of approximately $1.2 million and had net cash used in operations of approximately $1.5 million. As of June 30, 2021, the Company had accumulated deficit of approximately $18.5 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

To date, the Company has funded its research and development and operating activities through sales of debt and equity securities, grant funding and licenses of its products.

The Company intends to continue to seek funding through investments by strategic partners and from private and public sales of securities until such time that the Company generates sufficient cash flow to sustain its operations.

There is no guarantee that the Company will be able to raise sufficient capital or generate a level of revenues to sustain its operations. Management believes that the Company’s capital requirements depend on many factors, including liquidity necessary for the continued development and marketing of its products. These financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.

Note 4 – Intangible Assets

The following is a summary of activity related to intangible assets, which consists of capitalized patent costs as follows:

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 4 – Intangible Assets, continued

Future amortization of intangible assets is as follows:

Amortization expense was $13,827 and $13,827 for the six-months ended June 30, 2021 and 2020, respectively.

Note 5 – Convertible Notes and Notes Payable, Net

2018 Notes

During 2018, the Company initiated a private placement offering for the issuance of $1,000,000 in aggregate principal convertible promissory notes (“2018 Notes”), resulting in the issuance of multiple notes in the aggregate principal amount of $794,000, inclusive of a $50,000 note to a principal stockholder and chairman of the board and $50,000 note to the former Company’s Chairman of the Board and the prior chief financial officer. During 2019, an additional $10,000 promissory note was issued with the same terms. The 2018 Notes bore interest at a rate of 10% per year, payable quarterly, on March 31, June 30, September 30 and December 31 of each year, with a maturity date of
June 30, 2021.

Prior to the completion of an Initial Public Offering (“IPO”) of common stock, as defined, the holders of the 2018 Notes may elect to convert all outstanding principal and accrued interest into shares of common stock at a conversion price of $1.60 per share, and at a conversion price equal to the sale price of the common stock at any time following the completion of an IPO.

Subsequent to completion of an IPO of at least $1,000,000, the Company may elect to require holders of the 2018 Notes to convert all of the outstanding principal and accrued interest into shares of Common Stock at a conversion price equal to 80% of the sale price of the Common Stock in the IPO.

Conversion of the 2018 Notes

With the completion of a Series C Preferred Stock Offering (“Series C Offering”) which resulted in gross proceeds in excess of $1,000,000 during 2021, the Company required the holders of the 2018 notes to convert their outstanding principal and accrued interest into shares of common stock at a conversion rate of $1.60 (80% of the $2 price per share in the Series C Offering). During the six months ended June 30, 2021, $804,000 of principal and accrued interest of $19,870 were converted to 514,922 shares of common stock.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 5 – Convertible Notes and Notes Payable, Net

Conversion of the 2018 Notes , continued

Since the 2018 Notes were converted to shares of common stock under terms that differed from the original conversion terms of the 2018 Notes, the Company recorded a gain on the extinguishment of the 2018 Notes in the amount of $516,464. The gain reflects the difference between the carrying amount of the 2018 Notes and the estimated fair value of the shares of common stock issued upon conversion.

In estimating the fair value of common stock, the Company used the backsolve method, which utilizes the option pricing method to calculate an implied value of  $.597 per share of common stock. For purposes of the backsolve method, the Company used the recent sales transactions of the Series C Preferred Stock which were purchased at a price of $2.00 per share (see Note 6). A summary of the key inputs used in the backsolve method at June 30, 2021 were volatility of 96%, risk free rate of .31 %, and an estimated three year period until a  liquidity or an exit.

As of June 30, 2021 and December 31, 2020 the total principal outstanding on the 2018 Notes was $0 and $804,000, respectively.

2019 Notes

During 2019, the Company issued convertible promissory notes in the aggregate amount of $486,511 (the “2019 Notes"). The issuance of the 2019 Notes resulted in the Company receiving net proceeds of $418,593. The 2019 Notes bore interest at a rate of 5% compounded each calendar quarter commencing with June 30, 2019. All outstanding principal and accrued interest were due May 2021 ("Maturity Date'').

Of the total 2019 Notes, $23,167 was issued as consideration related to debt issuance costs. In addition, the Company paid debt issuance costs of $44,751 for total aggregate debt issuance of costs of $67,918 were recorded as discount on the debt to be amortized over the twenty -four-month term of the 2019 Notes.

The 2019 Notes automatically will convert to equity upon the occurrence of: 1) the sale and issuance of preferred stock in which the Company receives gross proceeds of $ 1,000,000 or more ("Qualified Equity Financing”) or 2) a Corporate Transaction, as defined in the agreement. If automatic conversion does not occur by the Maturity Date, the 2019 Note holders can elect, by a majority, to require the Company to pay the outstanding balance or convert the 2019 Notes into shares.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 5 – Convertible Notes and Notes Payable, Net, continued

2019 Notes, continued

Upon conversion, the conversion price shall be based on the following:

Qualified Equity Financing – the lower of: a) a 20% discount to the price paid per share for the preferred stock (the “Discount”) issued in the Qualified Equity Financing or b) the quotient resulting from dividing $32,400,000 (the "Valuation Cap”) by the fully-diluted shares outstanding immediately prior to the closing of the Qualified Equity Financing. Upon conversion, the 2019 Note holders will receive shares equivalent to shares issued in the Qualified Equity Financing except the liquidation preference per share shall equal the conversion price.

Corporate Transaction – the quotient resulting from dividing the Valuation Cap by the fully diluted shares outstanding immediately prior to the closing of a Corporate Transaction.

At Maturity – the quotient resulting from dividing the Valuation Cap by the fully diluted shares outstanding immediately prior to the closing of a Corporate Transaction.

If the Company issues convertible debt in any future series separate from the 2019 Notes at a lower pre-money valuation cap or higher discount, the Valuation Cap and/or Discount on the 2019 Notes will be automatically amended to the lower Valuation Cap and/or higher Discount, as applicable.

The above conversion features embedded in the 2019 Notes resulted in the Company recognizing a beneficial conversion feature, measured at its intrinsic value on issuance date, of approximately $392,000, which was recorded as discount to the debt and additional paid in capital. The debt discount is being amortized over the term of the 2019 Notes.

During the six-months ended June 30, 2021 and 2020, the Company recognized aggregate amortization expense of $98,648 and $114,980, respectively related to the beneficial conversion feature and debt issuance costs which is included on the statements of operations. As of June 30, 2021 and December 31, 2020, the aggregate unamortized debt discount was $0 and $98,648, respectively.

2019 Promissory Note

On October 31, 2019, the Company issued a promissory note with an unrelated individual in the amount of $100,000. The promissory note bears interest at 10% and is due October 31, 2024. The note holder may elect to convert all, but only all, of the outstanding principal and accrued interest into shares as follows: 1) prior to an initial public offering (IPO) at a conversion price of $2.00 or 2) at the completion of an IPO, at a conversion price equal to the share price paid in the IPO less a 10% discount.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 5 – Convertible Notes and Notes Payable, Net, continued

2019 Promissory Note, continued

Further, the Company may elect to repay the principal and accrued interest in the form of equity shares as follows: 1) upon 15 days advance notice to the lender of the Company’s election to convert into equity shares at a conversion rate of $2 or 2) at any time following a public offering of stock that results in gross proceeds of at least $1,000,000, the Company may elect to require the lender to convert all outstanding principal and accrued interest into equity shares at a 10% discount to the offering price.

Conversion of the 2019 Notes and 2019 Promissory Note

During the six months ended June 30, 2021, the aggregate outstanding principal and accrued interest outstanding on the 2019 Notes and 2019 Promissory Note of $586,511 and $60,126, respectively, were converted to 570,541 shares of Series C Preferred Stock. The conversion of the 2019 Notes was triggered by a Qualified Equity Financing that occurred in 2021. The Company elected to require the holder of the 2019 Promissory Note to convert the outstanding principal and accrued interest into the Series C Preferred Stock after the sale of Series C Preferred Stock that resulted in gross proceeds in excess of $1,000,000 (see Note 6). Since the conversion was in accordance with the original terms of the 2019 Notes and 2019 Promissory Note, no gain or loss was recorded upon conversion and the $646,637 of outstanding principal and accrued interest was classified to equity.

As of June 30, 2021 and December 31, 2020, the total principal outstanding on the 2019 Notes and 2019 Promissory Note was $0 and $586,511, respectively.

2020 Notes

During 2020, the Company issued promissory notes in the principal amount of $715,000 of which $40,000 was with related parties. In 2021, the Company issued an additional promissory note with a principal amount of $30,000 (collectively referred to as the “2020 Notes”). In connection with the 2020 notes, the Company issued options to purchase 372,500 shares of common stock at a share price of $2.00, which was recorded as a debt discount in the amount of $28,463 and additional paid-in-capital based on the relative fair value method. The fair value of the options issued was determined using the blacksholes method, an application of the option pricing model, which uses the price established by a recent financing transaction of the Company’s equity participating securities to compute a total equity value for the Company (see Notes 6 and 7). The debt discount was amortized over the terms of the 2020 notes of one (1) year. In 2021, $670,000, including $40,000 to related parties, of outstanding principal on the 2020 Notes were repaid in in cash and all accrued interest outstanding at that time

Certain holders of the 2020 Notes elected to convert their outstanding principal and accrued interest into shares of common stock.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 5 – Convertible Notes and Notes Payable, Net, continued

2020 Notes, continued

Conversion of the 2020 Notes

During the six months ended June 30, 2021, $75,000 of outstanding principal and accrued interest of $13,000 of 2020 Notes were converted to 55,000 shares of common stock. Since the 2020 Notes were converted to shares of common stock, the Company recorded a gain on the extinguishment of the 2020 Notes in the amount of $55,165. The gain reflects the difference between the carrying amount of the 2020 Notes and the estimated fair value of the shares of common stock issued upon conversion.

In estimating the fair value of common stock, the Company used the backsolve method, which utilizes the option pricing method to calculate an implied value of $.597 per share of common stock. For purposes of the backsolve method, the company used the recent sales transactions of the Series C Preferred Stock which were purchased at a price of $2.00 per share (see Note 6). A summary of the key inputs used in the backsolve method at December 31, 2021 were volatility of 96%, risk free rate of .31 %, and an estimated period of three years till liquidity or an exit.

During the six months ended June 30, 2021, an aggregate of outstanding principal and accrued interest of $1,558,506 on the 2018 Notes, 2019 Notes and 2020 Notes was converted into 570,541 Series C Preferred Stock and 569,922 shares of common stock. This resulted in an aggregate gain on extinguishment of $571,629 which has been reflected on the statement of operations.

At June 30, 2021 and December 31, 2020, aggregate outstanding principal and accrued interest on the 2018 Notes, 2019 Notes and 2020 Note was $0 and $2,105,511, including $140,000 with related parties, and $0 and $105,900 which is included in the caption accounts payable and accrued liabilities on the balance sheets, respectively. Refer to subsequent events (Note 12) for additional debt obtained.

CARES Act Paycheck Protection Program Loan

In April 2020, the Company entered into a promissory note evidencing an unsecured loan (the “Loan”) in the amount of $27,212 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration.

The promissory note matures in April 2022 and bears interest at a rate of 1% per annum. Beginning November 2020, the Company is required to make 18 monthly payments of principal and interest in the amount of approximately $1,600. The Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from the Loan may only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 5 – Convertible Notes and Notes Payable, Net, continued

CARES Act Paycheck Protection Program Loan, continued

The Note contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the Loan documents. The occurrence of an event of default will result in an increase in the interest rate to 18% per annum and provides the lender with customary remedies, including the right to require immediate payment of all amounts owed under the promissory note. In 2021, the Company received notification that Loan was forgiven and recorded gain on extinguishment of $27,408.

Note 6 – Stockholders’ Equity

The Company is authorized to issue 50,000,000 shares of common stock with a par value of $0.001 per share and 20,000,000 shares of preferred stock with a par value of $0.001. The Board of Directors has designated (a) 150,000 shares as Initial Preferred Stock, (b) 1,500,000,000 shares of Series A Preferred Stock, and (c) 6,000,000 shares of Series B Preferred Stock, and (d) 10,000,000 shares of Series C Preferred Stock.

Common Stock

With the completion of a Series C Preferred Stock Offering which resulted in gross proceeds in excess of $1,000,000, the Company had convertible notes and notes payable convert to 569,922 shares of common stock in 2021 (see Note 5).

At June 30, 2021 and December 31, 2020, the Company had 10,117,042 and 9,547,120, respectively shares of common stock issued and outstanding. The holders of common stock are entitled to one vote for each share held of record upon such matters and in such manner as may be provided by law.  Subject to preferences applicable to any shares of the Company’s outstanding Preferred Stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available, therefore.  In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any shares of the Company’s outstanding Preferred Stock. Holders of common stock have no pre-emptive rights or rights to convert their common stock into any other securities. There is no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable.

At June 30, 2021 and 2020, the Company had (1) 150,000 shares of Initial Convertible Preferred Stock (Initial Preferred), (2) 576,190 shares of Series A Convertible Preferred Stock (Series A Preferred), (3) 2,574,865 shares of Series B Convertible Preferred Stock (Series B Preferred) issued and outstanding. The Initial Convertible Preferred stock has a liquidation preference of $2 per share ($300,000). The Series A Convertible Preferred Stock has a liquidation preference of $4 per share ($2,304,760). The Series B Convertible Preferred Stock has a liquidation preference in the amount paid by the holders (ranging from $2.50 to $4 per share, $7,360,960 in the aggregate). In the event of any liquidation event, the order of liquidation preference is as follows: the (1) Initial Preferred Stock (in parity with Series A Preferred), (2) Series A Preferred (in parity with Initial Preferred Stock) and (3) Series B Preferred.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 6 – Stockholders’ Equity, continued

Preferred Stock, continued

Each share of Initial Preferred Stock is convertible into 2.4 shares of Common Stock, and both the Series A and Series B Preferred stock are each convertible into two (2) shares of Common Stock.

During 2020, the Company amended its Articles of Incorporation to designate 10,000,000 shares as Series C Preferred Stock of which 500,000 shares were designated as Series C-1 Preferred Stock. Each share of Series C-1 Preferred Stock (“Series C-1”) has a par value $0.001 and a stated value equal to its conversion rate.

Each share of Series C Preferred Stock has a par value $0.001 and a stated value equal to $2.00 (“Series C Purchase Price”). All other rights and privileges of the Series C Preferred Stock and Series C-1 are identical except the stated value as discussed above.

Holders of the Series C and C-1 Preferred Stock will vote with holders of common Stock as a single class and will participate in all dividends that are declared and paid on Common Stock on the same basis as if each shares of Series C and C-01 Preferred Stock were converted into Common Stock.

Holders of the Series C and C-1 Preferred Stock may voluntarily convert the Series C and C-1 Preferred Stock into shares of Common Stock on a one-to-one ratio, and the Series C and C-1 Preferred Stock will automatically conversion a Public Offering resulting in at least $20 million of net proceeds to the Company.

In the event of any liquidation event, the holders of the Series C and C-1 Preferred Stock will have a liquidation preference in parity with the holders of Initial Preferred Stock and Series A Preferred Stock. The Series C Convertible Preferred Stock has a liquidation preference of $5,989,114 (2,931,132 at $2 per share). The Series C-1 Convertible Preferred Stock have a liquidation preference of $532,472 (507,116 at $1.05 per share).

With the completion of a Series C Preferred Stock Offering (“Offering”) which resulted in gross proceeds in excess of $1,000,000, the Company issued 2,424,016 Series C Preferred Stock for $2.00 which generated $3,767,309 of net proceeds, net of $962,391 equity issuance costs. As of December 31, 2020, $137,882 of these issuance costs were classified on the balance sheet as deferred offering cost. Upon completion of the Series C Offering these deferred offering costs were recorded as a reduction of additional paid-in capital.

As further disclosed in Note 5, the completion of the Offering resulted in convertible notes payable being converted into 570,541 of Series C-1 Preferred Stock.

At June 30, 2021 and December 31, 2020, the Company had issued and outstanding 2,994,557 and no shares of Series C and C-1 Preferred Stock, respectively.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 7 – Stock-Based Compensation

In April 2007, the Company’s shareholders adopted the 2007 Stock Incentive Plan (“2007 Plan”), providing for the grant of stock options and restricted stock awards to employees, non-employee service providers and Board members. Plan Options granted under the plan may include non-statutory stock options as well as incentive stock options intended to qualify under Section 422 of the Internal Revenue Code.  Awards under the 2007 may be granted only during the ten years immediately following the effective date of the Plan.

During 2018, the Company’s Board adopted the 2018 Stock Incentive Plan (“2018 Plan”), effectively replacing the 2007 Plan, to provide for the issuance of up to 5,000,000 shares of stock through the grant of stock options, restricted stock or restricted stock units.

During 2021, the Company granted options to the Company’s President to purchase 424,800 shares of common stock at an exercise price of $2.00 per share and a grant date fair value of $0.16.

During 2020, the Company granted options to purchase 357,500, 20,000 of which were issued to related parties, shares of common stock at an exercise price of $2.00 per share with a term of five years and a grant date fair value of approximately $0.08 in connection with the issuance of notes payable (see Note 5). The Company also granted options to two directors to purchase a total of 300,000 shares of common stock at an exercise price of $2.00 per share and a term of five years. Of the options granted, 200,000 options vest immediately, and 100,000 vest over one (1) year at 25,000 per quarter. The grant date fair value of the options was approximately $0.09.

At December 31, 2020, the Company has options outstanding to purchase 5,161,834 shares of common stock under the 2007 and 2018 Plans at exercise prices ranging from $0.05 to $2.00 per share and with remaining vesting periods of one to five (5) years.

The Company determined the grant date fair value of the options granted using the Black Scholes Method using the following assumptions:

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 7 – Stock-Based Compensation, continued

The following is a summary of the Company’s stock option activity:

The following table summarizes stock option information at June 30, 2021:

During the six months ended June 30, 2021, 302,933 options vested with a weighted average grant date fair value of $.69. Stock compensation expense for the six months ended June 30, 2021 and 2020 were $33,248 and $88,899, respectively, which is included in payroll expense on the statements of operations.

At June 30, 2021, there was 354,000 options unvested with an average grant date fair value of $.16 and $55,094 of unrecognized compensation costs related to stock options which will be recognized over the weighted average remaining years of 2.50.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 8 – Related Party Transactions

Upon expiration of the Company’s office lease in 2017, the Company began leasing space from the Company’s President on a month-to-month basis for $2,000 monthly through June 30, 2020. Total rent expense incurred on space leased from the Company’s President was $12,000 for the year ended December 31, 2020 which is included in selling, general and administrative expenses on the statement of operations. The Company did not occupy the office in 2021.

See Note 5 for convertible notes and notes payable with related parties.

Note 9 – Commitments and Contingencies

From time-to-time, the Company may become involved in various claims and legal proceedings of a nature considered normal to its business. While it is not feasible to predict or determine the financial outcome of any proceedings, management does not believe that the resolve of unasserted claims and proceedings will result in a material adverse effect on the Company’s financial position, results of operations or liquidity.

Note 10 – Concentration of Credit Risks

During the six months ended June 30, 2021 and 2020, the Company generated revenues and accounts receivable from two (2) customers.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits in excess of the FDIC insured limit of $250,000. At June 30, 2021 and December 31, 2020, such cash balances were in excess of federally insured amounts by approximately $1,915,000 and $234,000, respectively.

During the six months ended June 30, 2021 and 2020, the Company purchased from one (1) vendor 97% and $94%, respectively of research and laboratory fees. At June 30, 2021 and 2020 the vendor accounted for 62% and 22% of total accounts payable.

Note 11 – Income Taxes

The Company will have approximately $12.3M of operating loss carry-forwards as of June 30, 2021. Net deferred tax assets are mainly comprised of temporary differences between financial statement carrying amount and tax basis of assets and liabilities.

Net deferred tax assets are mainly comprised of temporary differences between financial statement carrying amount and tax basis of assets and liabilities.

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At June 30, 2021 and December 31, 2020, the Company’s deferred tax assets have been fully valued due to the uncertainty of the Company’s ability to generate taxable income and benefit from these deferred tax assets.

Cytonics Corporation

Notes to the Condensed Financial Statements

Note 11 – Income Taxes, continued

In addition, the Company performed a comprehensive review of its uncertain tax positions and determined that no adjustments were necessary relating to unrecognized tax benefits at June 30, 2021. The Company's federal and state income tax returns are subject to examination by taxing authorities for three years after the returns are filed, and the Company's federal and state income tax returns for 2018 through 2020 remain open to examination.

Note 12 – Subsequent Events

In January 2022, the Company issued 150,000 options to board directors that can be exercised for $2 which expire in 5 years and vest over 1 year at 12,500 per quarter. These options which will result in stock compensation of $24,150 over the vesting period. Additionally, options to purchase 629,276 shares of stock previously reflected as forfeited were reinstated to their original terms.

2022 Notes

In 2022, the Company issued promissory notes in the principal amount of $360,000 (collectively referred to as the “2022 Notes”) with applicable interest per annum ranging from 15% through 20%. In connection with the 2022 notes, the Company issued options to purchase 190,000 shares of common stock at a share price of $2.00, which was recorded as a debt discount in the amount of $30,590 and additional paid-in-capital based on the relative fair value method. The fair value of the options issued was determined using the blacksholes method, an application of the option pricing model, which uses the price established by a recent financing transaction of the Company’s equity participating securities to compute a total equity value for the Company (see Notes 6 and 7). The debt discount was amortized over the terms of the 2022 notes of one (1) year.

The 2022 notes are due at the earlier of the close of a qualified equity financing or in one year from the date of the note (“Maturity Date”). Qualified equity financing is defined as when the Company issues and sells shares of its equity securities to investors prior to the Maturity Date in an equity financing of not less than of $1.5 or $2.0 million. Upon quailed equity financing, outstanding principal amount plus interest, as if they loan was being repaid on the Maturity Date. (e.g. If the principal amount of the Note is $100,000, then upon a qualified financing the holder shall be repaid $115,000, which is inclusive of all accrued interest of 15%).

Preferred Stock

In 2022, the Company initiated a Series C Preferred Stock Offerring (“2022 Offerring”) which resulted in gross proceeds in excess of $2,800,000, the Company issued 1,264,275 Series C Preferred Stock for either (a) $1.84 per share for subscriptions received no later than April 22, 2022, (b) $2.07 per share for subscriptions received after April 22, 2022 but not later than April 29, 2022, and (c) $2.30 per share for subscriptions received after April 29, 2022 or where all or a portion of the Purchase Price is being paid by cancellation of indebtedness of the Company to such Purchaser. The 2022 offering, generated $2,490,418 of net proceeds, net of $276,079 equity issuance costs. In 2022, $276,079 of these issuance costs were classified on the balance sheet as deferred offering cost. Upon completion of the Series C 2022 Offerring these deferred offering costs were recorded as a reduction of additional paid-in capital.

Item 4. Exhibits.

Index to Exhibits

*Filed herewith. 

† Includes management contracts and compensation plans and arrangements

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly organized.

Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.