NOTE 8. STOCKHOLDER’S EQUITY
Preferred Shares — The Company is authorized to issue 1,000,000 preferred shares with a par value of $0.0001 per share with such designation, rights and preferences as may be determined from time to time by the Company’s Board of Directors. At JuneSeptember 30, 2023 and December 31, 2022, there were no preferred shares issued or outstanding.
Class A Common Stock 862,260— The Company is authorized to issue 100,000,000 shares of Class A Common Stock and 1,031,000 common stock options outstanding respectively, with a par valueweighted average remaining contractual life of $0.0001 per share. Holders5.32 and 7.11 years, respectively.
As of the Company’s Class A Common Stock are entitled to one vote for each share. At JuneSeptember 30, 2023 and December 31, 2022, there were 2,731,544 shares739,424 and 567,581 common stock options exercisable at a weighted average remaining contractual life of Class A Common Stock issued4.89 and outstanding that were subject5.56 years, respectively.
Black Scholes Assumptions
The determination of the fair value of stock options using an option valuation model is affected by the Company’s stock price valuation, as well as assumptions regarding a number of complex and subjective variables. The volatility assumption is based on volatilities of similar companies over a period of time equal to possible redemption and 585,275 sharesthe expected term of non-redeemable Class A Common Stock issued and outstanding that were issuedthe stock options. The volatilities of similar companies are used in connectionconjunction with the private placement (Note 4).Company’s historical volatility because of the lack of sufficient relevant history for the Company’s
Class B Common Stock —
common stock equal to the expected term. The Companyexpected term of the employee stock options represents the weighted average period for which the stock options are expected to remain outstanding. The expected term assumption is authorized to issue up to 10,000,000 sharesestimated based primarily on the options’ vesting terms and remaining contractual life and employees’ expected exercise and post- vesting employment termination behavior. The risk-free rate for periods within the contractual life of Class B Common Stock with a parthe option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the expectation of no future dividend payouts by the Company.
The fair value of $0.0001 per share. Holders of the Company’s Class B Common Stock are entitled to one votestock options was estimated assuming no expected dividends and the following weighted average assumptions:
SCHEDULE OF FAIR VALUE OF STOCK OPTIONS
| | | 2022 | | | 2011 | |
| Expected life in years | | | 5.89 | | | | 6.08 | |
| Risk-free interest rate | | | 0.55 | % | | | 0.49 | % |
| Expected dividend yield | | | 0.00 | % | | | 0.00 | % |
| Expected volatility | | | 32 | % | | | 60 | % |
The total expense recognized for each share. On February 25, 2021,share-based payments was $20,132 for the Sponsor transferred 15,000 shares toperiod ending September 30, 2023 and $45,584 for the Company’s Chief Executive Officer, 15,000 shares to the Company’s Chief Financial Officer and 5,000 shares to two of the Company’s independent directors. Following the determination of the Company’s third independent director, on March 23, 2021, the Sponsor transferred 5,000 shares to such independent director.
Onyear ended December 31, 2022, ARC Group Limited,2022. These costs are included in the Company’s Financial Advisor, was granted 1,378,517 sharesstatements of Class B common stock with a par valueoperations. As of $0.0001 per share, up to 143,766 of which are subject to forfeiture if the Company’s public stockholders exercise redemption rights with respect to any of the Company’s remaining outstanding shares of Class A common stock.
Accordingly, at JuneSeptember 30, 2023 there was $8,591and as of December 31, 2022, there was $75,987 of unrecognized compensation costs related to stock option grants which will be recognized over the next two years.
Stock Warrants
In 2021, there were 4,253,517174,102 outstanding common stock warrants issued for service at a weighted average exercise price of $0.10. The weighted average remaining contractual life was 3.71 years as of September 30, 2023.
In 2022 for the exercise price of $1.00, the company issued 145,746 warrants for 2021 service and 294,000 warrants for 2022 service, 2,056,000 in warrants were issued attached to convertible notes. The weighted average remaining contractual life of the warrants issued in 2022 is 3.80 years.
For the period ending September 30 2023, the company issued 1,550,000 warrants attached to convertible notes. The weighted average remaining contractual life of these warrants is 4.74 years.
All warrants vested immediately upon grant issuance. The Company expensed $852,500 for the period ended September 30, 2023 and $1,346,288 in Fiscal 2022 in relation to the issuance of the Warrants.
SCHEDULE OF STOCK WARRANTS
| | | Options Outstanding | | | Weighted-Average Exercise Price | | | Aggregate Intrinsic Value | |
| Outstanding as of December 31, 2022 | | | 2,669,848 | | | $ | 0.94 | | | $ | 2,513,156 | |
| Issued | | | 1,550,000 | | | | | | | | | |
| Outstanding as of September 30, 2023 | | | 4,219,848 | | | $ | 0.96 | | | $ | 4,063,156 | |
| | | | | | | | | | | | | |
| Warrants exercisable as of September 30, 2023 | | | 4,219,848 | | | $ | 0.96 | | | $ | 4,063,156 | |
Commitments, Contingencies, and Concentrations Operating lease
The Company has a month-to-month lease for a suite at a cost of $575 per month.
The Company incurred $5,666 for the period ended September 30, 2023 and $7,694 for the year ended December 31, 2022 of rent expense.
Receivable from SPAC for IPO Related Costs
During 2022, the company entered a Business Combination Agreement with SPAC Data Knights. $2,059,975 of SPAC related expenses are on the Balance Sheet as receivable to be received at close of the merger.
NOTE 4 — ACCOUNTS RECEIVABLE, NET
Accounts receivable are unsecured, recorded at net realizable value, and do not bear interest. Accounts receivable are considered past due if not paid within the terms established between the Company and the customer. Amounts are only written off after all attempts at collections have been exhausted. The Company determines the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. As of December 31, 2022 the Company established allowances of $102,700. The net receivable balances outstanding are fully collectible.
NOTE 5 — PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The straight-line method is used for computing depreciation and amortization. Assets are depreciated over their estimated useful lives ranging from three to five years. Cost of maintenance and repairs are charged to expense when incurred.
NOTE 6 — RELATED PARTY TRANSACTIONS
Convertible Promissory Notes held by Related Party
For the period ending September 2023, the Company entered into various Convertible Promissory Notes (“Note”) with related party investors totaling $2,100,000 (2022 - $4,700,000) and unrelated party investors of $1,775,000 (2022 - $440,000). The Notes issued are unsecured and bear an interest rate of six percent annually from the date of issuance until the outstanding principal is paid or converted. On November 11, 2022 the Convertible note agreement was amended and restated in order to (i) provide for the sale and issuance to Purchasers from the effective date of January 1, 2022 and after the date of this Agreement of up to an additional $4,000,000 aggregate principal amount of Notes and warrants to purchase shares of Class B Common Stock issuedthe Company’s capital stock, (ii) provide for the sale and outstanding.issuance to Purchasers who purchased Notes under the Prior Agreement between the Effective Date and the date of this Agreement of warrants to purchase shares of the Company’s common stock at an exercise price of $1.00 per share; (iii) extend the maturity date of all outstanding Notes from December 31, 2022 to October 31, 2023.
Holders
The principal and unpaid accrued interest on each Note will convert; (i) automatically, upon the Company’s issuance of Class A Common Stock and Class B Common Stock will vote together asequity securities (the “Next Equity Financing”) in a single class on all other matters submittedtransaction, or series of related transactions, with aggregate gross proceeds to a votethe Company of stockholders, except as required by law.
The shares of Class B Common Stock will automatically convertat least $5,000,000, into shares of Class A Commonthe Company’s capital stock issued to investors in the Next Equity Financing, at a conversion price equal to the lesser of (A) a 20% discount to the lowest price per share of shares sold in the Next Equity Financing, or (B) $2.50 per share; (ii) at the noteholder’s option, in the event of a defined Corporate Transaction while such Note remains outstanding, into shares of the Company’s Series A-2 Preferred Stock at a conversion price equal to $2.50 per share; and (iii) at the timenoteholder’s option, on or after the Maturity Date while such Note remains outstanding, into shares of the Business Combination onCompany’s Series A-2 Preferred Stock at a one-for-one basis, subjectconversion price equal to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and$2.50 per share.
If a Corporate Transaction occurs before the like. In the case that additional shares of Class A Common Stock,repayment or equity linked securities, are issued or deemed issued in excessconversion of the amounts offered inNotes, the Initial Public Offering and related toCompany will pay at the closing of the Corporate Transaction to each noteholder that elects not to convert its Notes in connection with such Corporate Transaction an amount equal to the outstanding principal amount of such noteholder’s Note plus a Business Combination,20% premium. “Corporate Transaction” means (a) a sale by the ratio at which sharesCompany of Class B Common Stock shall convertall or substantially all of its assets, (b) a merger of the Company with or into shares of Class A Common Stock will be adjusted (unlessanother entity (if after such merger the holders of a majority of the Company’s voting securities immediately prior to the transaction do not hold a majority of the voting securities of the successor entity) or (c) the transfer of more than 50% of the Company’s voting securities to a person or group.
During November 2019, the Company entered into a Convertible Promissory Note (“Note”) agreement with a related party investor. The total amount of the Note is $1,500,000. The Note is unsecured and bears interest at a rate of four percent annually from the date of issuance until the outstanding sharesprincipal is paid or converted. The Note matures on January 1, 2025. The Note shall automatically convert into the next offering of Class B Common Stock agree to waivepreferred stock upon closing of such adjustment with respect to any such issuance or deemed issuance) so that thenext equity financing. The number of shares of Class A Common Stock issuablepreferred stock to be issued upon conversion shall be equal to the number obtained by dividing the outstanding principal and unpaid accrued interest owed on the date of all sharesconversion, by the conversion price. The conversion price is 100 percent of Class B Common Stock will equal,the lowest price per share paid for the next equity preferred stock by other investors in the aggregate, onnext equity financing. In the event that prior to the conversion or repayment of amounts owed, the Company completes a financing transaction in which the Company sells equity securities but such transaction does not qualify as next equity financing (i.e. an as converted basis, 20%“alternative financing”), then the principal and unpaid accrued interest may (upon written election of the sumpurchaser holding the Note) convert into the securities issued by the Company in the alternative financing. The number of alternative financing equity securities to be issued upon such conversion shall be equal to the number obtained by dividing the outstanding principal and unpaid accrued interest owed by an amount equal to 100 percent multiplied by the lowest price per share at which the alternative financing equity securities are sold and issued for cash in the alternative financing.
As of September 30, 2023 $13,865,000 and as of December 31, 2022 there was $9,990,000 in outstanding principal balance on the Notes, respectively, and $1,193,896 and $690,772 in accrued interest, respectively, all included in long-term liabilities on the balance sheet. There have been no payments of principal or interest to date. In connection with the $3,875,000 in convertible notes issued in 2023 (Fiscal 2022 - $5,140,000), 1,550,000 (Fiscal 2022 - 2,056,000) in warrants were issued.
NOTE 7 — REVENUE RECOGNITION
Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer. 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 under topic 606. A contract’s transaction price is allocated to each distinct performance obligation in proportion to the standalone selling price for each and recognized as revenue when, or as, the performance obligation is satisfied.
The steps the company uses to determine revenue recognition are as follows: identification of the totalcontract with a customer, identification of the performance obligations, determining the transaction price, allocation of the transaction price to the performance obligation and recognition of revenue when the Company satisfies the performance obligation.
Individual promised goods and services in a contract are considered a performance obligation and accounted for separately if the good or service is distinct. A good or service is considered distinct if the customer can benefit from the good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement.
The Company generates revenue from two streams: (1) iRWDTM (imaging Real World Data) which provides regulatory grade imaging and clinical data in the Pharmaceutical, Device Manufacturing, CRO’s and AI markets and (2) BEAM which is a Medical Imaging Exchange platform between Hospital/Healthcare Systems, Imaging Centers, Physicians and Patients.
iRWD is sold on a fixed fee basis based on the number of data units and the cost per data unit committed to in the customer contract. Revenue is recognized when the data is delivered to the customer.
Beam revenue is subscription-based revenue which is recognized ratably over the subscription period committed to by the customer. The company invoices its Beam customers quarterly or annually in advance with the customer contracts automatically renewing unless the customer issues a cancellation notice.
The Company excludes from revenue taxes collected from a customer that are assessed by a governmental authority and imposed on and concurrent with a specific revenue-producing transaction.
The transaction price for the products is the invoiced amount. Advanced billings from contracts are deferred and recognized as revenue when earned.
Deferred revenue consists of payments received in advance of performance under the contract. Such amounts are generally recognized as revenue over the contractual period. The Company receives payments from customers based upon contractual billing schedules. Accounts receivable is recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts typically range from zero to 90 days, with typical terms of 30 days.
NOTE 8 — INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities. The Company provides for deferred taxes at the enacted tax rate that is expected to apply when the temporary differences reverse. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits.
The Company has generated both federal and state net operating losses (NOL) of approximately $21 million and $23 million, respectively, which if not used, will begin to expire in 2030. The Company believes that its ability to fully utilize the existing NOL carryforwards could be restricted on a portion of the NOL by changes in control that may have occurred or may occur in the future and by its ability to generate net income. The Company has not yet conducted a formal study of whether, or to what extent, past changes in control of the Company impairs its NOL carryforwards because such NOL carryforwards cannot be utilized until the Company achieves profitability.
Components of deferred income taxes are as follows as of December 31:
SCHEDULE OF DEFERRED INCOME TAXES
| | | 2022 | | | 2021 | |
| Deferred Tax Assets | | | | | | | | |
| Net operating loss carry forward | | $ | 6,973,587 | | | $ | 5,604,237 | |
| Stock Compensation | | | 481,144 | | | | 467,925 | |
| Other | | | 53,268 | | | | 51,617 | |
| Gross deferred tax assets | | | 7,507,999 | | | | 6,123,778 | |
| Less valuation allowance | | | (7,507,999 | ) | | | (6,123,778 | ) |
| Net deferred tax assets | | $ | - | | | $ | - | |
The change in the valuation allowance was $1,384,220 and $764,878 for the years ended December 31, 2022 and 2021, respectively.
The effective tax rate for the years ended December 31, 2022 and 2021 differs from the federal and state statutory rates due to the full valuation allowance.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statement is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The tax years from inception through December 31, 2022 remain subject to examination by all major taxing authorities due to the net operating loss carryovers. The Company is not currently under examination by any taxing jurisdiction. The Company did not incur any interest or penalties during the years ended December 31, 2022 or 2021.
NOTE 9 — SHAREHOLDERS’ DEFICIT
The Company is authorized to issue 100,000,000 shares of common stock, outstanding upon the completionpar value of the Initial Public Offering plus all$0.0001 per share (“Common Stock”), and 1,000,000 shares of Class A Common Stock and equity linked securities issued or deemed issued in connection with aundesignated preferred stock, par value of $0.0001 per share. Before the Business Combination, (excluding anythe Company was authorized to issue 200,000,000 shares or equity linked securities issued, or to be issued, to any seller in a Business Combination, and any private placement-equivalent units and its underlying securities issued to the Sponsor or its affiliates upon conversion of loans made to the Company).
The Company may issue additional common stock, orpar value of $0.0001 per share, and 20,000,000 shares of preferred stock to complete its Business Combination or under an employee incentive plan after completionshares, par value of its Business Combination.
$0.0001 per share.
