STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

STOCKHOLDERS' EQUITY

NOTE 8 – STOCKHOLDERS' EQUITY 

Amendment of the Certificate of Designation

On June 17, 2021, the Company filed an amendment of the certificate of designation of Series A Preferred Stock. The Board of Directors, by unanimous written consent, duly adopted resolutions to amend the Series A Preferred Stock Certificate of Designations and changed the name from “Series A Preferred Stock” to “Series X Preferred Stock”. All dividend, liquidation preference, voting, conversion, and redemption rights, did not change from the originally filed Certificate of Designation of Series A Preferred Stock. There are 2,000 Series X Preferred Shares issued and outstanding as of September 30, 2021.

Pursuant to the Company’s amended and restated certificate of incorporation, as amended, the Company is authorized to designate and issue up to 1,000,000 shares of preferred stock, par value $0.0001 per share, in one or more classes or series . The Company had 10,000 preferred shares designated as Series X Preferred Stock and 990,000 shares of preferred stock authorized but undesignated and unissued.

During the quarter ended September 30, 2021, the Company designated 990,000 shares of preferred stock as 10.5% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). There are 552,000 shares of Series A Preferred Stock issued and outstanding as of September 30, 2021. Upon certain events, the Company may, subject to certain conditions, at the Company’s option, redeem the Series A Preferred Stock. See below for a further description of the Series A Preferred Stock:

Dividends: Holders are entitled to receive, cumulative cash dividends at the annual rate of 10.5% on $25.00 liquidation preference per share of the Series A Perpetual Preferred Stock. Dividends accrue and are payable in arrears beginning August 15, 2021, regardless of whether declared or there are sufficient earnings or funds available for payment. Sufficient net proceeds from the offering must be set aside to pay dividends for the first twelve months from issuance. The company has classified $1,207,500 as restricted cash as of September 30, 2021 as a reserve to pay the remaining required dividends for the first year.

Redemption: Company has an optional redemption right beginning July 16, 2022, which redemption price declines annually. The initial redemption price after year 1 is $30 and decreases annually over 5 years to $25 per share. The Company also has a special optional redemption right upon the occurrence of a Delisting Event or Change of Control, as defined, at $25 per share plus accrued and unpaid dividends.

Voting Rights: The holders have no voting rights, except for voting on certain corporate decisions, or upon default in payment of dividends for any twelve periods, in which case the holders would have voting rights to elect two additional directors to serve on the Board of Directors.

Conversion Rights: Such shares are not convertible unless and until the occurrence of a Delisting Event or Change of Control and when the Company has not exercised its special optional redemption right. The conversion price would be the lesser of the amount converted based on the $25.00 liquidation preference plus accrued dividends divided by the common stock price of the Delisting Event or Change of Control (as defined) or $5.353319 (Share Cap). Effectively, the Share Cap limits the common stock price to no lower than $4.67.

Reverse Stock Split

In June of 2020, the Company effected a 5:1 reverse stock split (the “Reverse Stock Split”) by filing an amendment to the Company’s Amended and Restated Certificate Incorporation with the Delaware Secretary of State. The Reverse Stock Split combined every five shares of Common Stock issued and outstanding immediately prior to effecting the Reverse Stock Split into one share of Common Stock. As a result, the number of issued and outstanding shares of Common Stock was retroactively adjusted in the consolidated financial statements.

2020 Incentive Plan

On March 31, 2020, the Company adopted the Applied UV, Inc. 2020 Omnibus Incentive Plan (the “Plan”) with 600,000 (post-split adjusted) shares of common stock available for issuance under the terms of the Plan. The Plan permits the granting of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and Other Awards. The objectives of the Plan are to optimize the profitability and growth of the Company through incentives that are consistent with the Company’s goals and that link the personal interests of Participants to those of the Company’s stockholders. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make or are expected to make significant contributions to the Company’s success and to allow

Participants to share in the success of the Company. From time to time, the Company may issue Incentive Awards pursuant to the Plan. Each of the awards will be evidenced by and issued under a written agreement.

If an incentive award granted under the Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to the company in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for future awards under the Plan. The number of shares subject to the Plan, and the number of shares and terms of any Incentive Award may be adjusted in the event of any change in our outstanding common stock by reason of any stock dividend, spin-off, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar transaction. There are 320,250 shares available for future grants under the plan. The Company also granted an additional 309,564 options outside of the plan during the nine months ended September 30, 2021.

A summary of the Company’s option activity and related information follows: 

	Shares Available for Grant			Number of Options			Weighted-Average Exercise Price		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Life (in years)		Aggregate intrinsic value
Balances, January 1, 2020		—			—		$	—	$	—			$	—
Options granted		462,500			137,500			4.96		2.27		10		—
Options forfeited/cancelled		750			(750	)		5.00		—				—
Options exercised		—			—			—		—				—
Balances, December 31, 2020		463,250			136,750		$	4.96	$	2.27		9.95	$	—
Options granted outside of the plan		—			309,564			7.80		5.06		9.42		—
Options granted		(238,000	)		238,000			8.66		5.79		9.75		—
Options forfeited/cancelled		95,000			(95,000	)		9.69		—				—
Options exercised		—			—			—		—				—
Balances, September 30, 2021		320,250			589,314		$	7.57	$	—		9.49	$	296,175
At September 30, 2021
Vested and exercisable					61,943		$	7.72					$	3,675

Share-based compensation expense for options totaling $236,043 and $432,933 was recognized for the three and nine months ended September 30, 2021, respectively, based on awards vested. Share-based compensation expense for options totaling $763 and $1,474 was recognized for the three and nine months ended September 30, 2020, respectively, based on awards vested.

The valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options.

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

As of September 30, 2021, there was $2,379,978 of total unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 3.1 years.

The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the nine months ended September 30, 2021 and year ended December 31, 2020 are set forth in the table below.

	2021			2020
Weighted average fair value of options granted	$	5.79		$	2.27
Risk-free interest rate		1.02% to 1.54%			0.31% to 0.37%
Volatility		75.04% to 85%			41.4% to 51.45%
Expected life (years)		5.36-10			5.5
Dividend yield		0.00	%		0.00	%

Common Stock Warrants

On August 31, 2020, the Company closed its offering (the “August Offering”) in which it issued 1,000,000 common shares at a public offering price of $5.00 per share. In connection with the Offering, the Company (i) received $5,750,000 less underwriting fees of $517,500 and write-off of capitalized IPO Costs in the amount of $341,145, resulting in net proceeds of $4,891,355. Additionally, the Company issued 167,794 shares to Ross Carmel of Carmel, Milazzo & Feil LLP for the Offering. In addition, the underwriters were granted a 45-day option to purchase up to an additional 150,000 shares of Common Stock or any combination thereof, to cover over-allotments, if any (the “Over-Allotment Option”). The shares were offered and sold to the public pursuant to the Company’s registration statement on Form S-1, filed by the Company with the SEC on August 26, 2020, as amended, which became effective on August 28, 2020.

A summary of the Company’s warrant activity and related information follows:

Schedule of the Company's warrant activity
	Number of Shares			Weighted-Average Exercise Price
Warrants Outstanding at January 1, 2020		—			—
Granted		85,000		$	5
Warrants Outstanding at December 31, 2020		85,000		$	5
Granted		150,095		$	6.40
Exercised		(42,676	)
Warrants Outstanding and exercisable, September 30, 2021		192,419		$	5.84

Share-based compensation expense of $0 and $100,896 for warrants granted was recognized for the three and nine months ended September 30, 2020, respectively, based on awards vested. There was no compensation expense related to warrants during the three and nine months ended September 30, 2021. The warrants granted in 2020 were issued in connection with the August and November offerings. The warrants issued in connection with the November offering contained a cash settlement feature which resulted in a warrant liability of $284,007 as of September 30, 2021. In connection with the preparation of the consolidated financial statements for the three months ended March 31, 2021, the Company recognized an error relating to the recognition of the initial warrant liability in November of 2020. The error caused additional paid in capital to be overstated by approximately $135,000, warrant liability to be understated by approximately $110,000, and net loss to be overstated by approximately $25,000 as of and for the year ended December 31, 2020. The Company concluded the impact on the interim and year ended December 31, 2020 financial statements was immaterial and corrected the balances as of September 30, 2021. For the three and nine months ended September 30, 2021, the Company recorded a gain (loss) on the change in fair value of warrant liability in the amount of $151,570 and ($148,882), respectively. The Company valued the warrant using the Black-Scholes option pricing model with the following terms on date of grant of: (a) exercise price of $6.5625, (b) volatility rate of 50.39%, (c) risk free rate of 0.26%, (d) term of five years, and (e) dividend rate of 0%. The Company valued the warrant using the Black-Scholes option pricing model with the following terms on September 30, 2021: (a) exercise price of $6.5625, (b) volatility rate of 73.45%, (c) risk free rate of 0.98%, (d) term of 4.12 years, and (e) dividend rate of 0%.

The valuation methodology used to determine the fair value of the warrants issued during the periods was the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the warrants.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the warrants.

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

As of September 30, 2021 there was no unrecognized compensation expense related to unvested warrants granted under the Company’s share-based compensation plans.

The weighted average fair value of warrants granted, and the assumptions used in the Black-Scholes model during the nine months ended September 30, 2021 are set forth in the table below.

	2021
Weighted average fair value of options granted	$	1.87
Risk-free interest rate		1.26	%
Volatility		50.13-50.39%
Expected life (years)		5
Dividend yield		0.00	%

On November 13, 2020, the Company closed its second offering (the “November Offering”) in which it issued 1,401,905 common shares at a public offering price of $5.25 per share. In connection with the Offering, the Company (i) received $7,360,000 less underwriting fees of $625,600 and write-off of previously related capitalized IPO Costs in the amount of $316,246, resulting in net proceeds of $6,418,155.

On July 13, 2021, Applied UV, Inc. (the “Company”) entered into an underwriting agreement (the “Underwriting Agreement”) with Ladenburg Thalmann & Co. Inc. as representative (“Representative”) of the underwriters (“Underwriters”), related to the offering of 480,000 shares (the “Shares”) of the Company’s 10.5% Series A Cumulative Perpetual Preferred Stock [non-convertible], par value $0.0001 per share (“Series A Preferred Stock”), at a public offering price of $25.00 per share, which excludes 72,000 shares of Series A Cumulative Perpetual Preferred Stock that may be purchased by the Underwriters pursuant to their overallotment option granted to the Underwriters under the terms of the Underwriting Agreement. The Shares were offered and sold by the Company pursuant to the terms of the Underwriting Agreement and registered pursuant to the Company’s registration statement on (i) Form S-1 (File No. 333-257197), as amended, which was filed with the SEC and declared effective by the Commission on July 12, 2021 and (ii) the Company’s registration statement on Form S-1MEF (File No. 333-257862), which was filed with the Commission on July 13, 2021 and declared effective upon filing. The closing of the offering for the Shares took place on July 16, 2021. The Shares have been approved for listing on Nasdaq under the trading symbol “AUVIP” and trading on Nasdaq began on July 14, 2021. On July 29, 2021, the Company issued a press release announcing that in connection with its previously announced public offering of its 10.5% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, it had closed the exercise of the underwriter’s overallotment option of 72,000 shares at $25.00 per share. Aggregate gross proceeds including the exercise of the underwriter's overallotment option was $12,272,440 after deducting underwriting discounts and commissions and fees and other estimated offering expenses. As of September 30, 2021, the Company paid $241,500 to its cumulative perpetual preferred shareholders in a form of a dividend. There are no dividends accrued for as of September 30, 2021.

Restricted Stock Awards

The Company records compensation expense for restricted stock awards based on the quoted market price of our stock at the grant date and amortize the expense over the vesting period.

On May 28, 2021, the Company granted 12,000 restricted stock awards with a fair market value of $99,000 to a consultant for past services. The amount was expensed immediately as compensation expense.

In June of 2020, the company granted 230,083 restricted stock awards. Of these awards, 127,583 vest quarterly over an 18-month period with the first date of vesting being September 30, 2020. As of September 30, 2021, 106,319 of these restricted stock awards were vested. The fair market value of these awards was $5 per share and the company expensed $106,319 and $318,958 of stock-based compensation related to these awards during the three and nine months ended September 30, 2021, respectively. On July 9, 2020, 62,500 restricted stock awards were granted. The restricted stock awards vest in full on January 1, 2021. As of September 30, 2021, all the restricted stock awards were vested. The fair market value of these awards was $5 per share. No expense was recorded related to these awards during the three and nine months ended September 30, 2021. On July 9, 2020, an additional 40,000 restricted stock awards were granted. The restricted stock awards vest evenly over a four-year period with the first vesting to occur on January 1, 2021. As of September 30, 2021, 7,500 of these restricted stock awards were vested. The fair market value of these awards was $5 per share and the company expensed $12,500 and $37,500 of stock-based compensation related to these awards during the three and nine months ended September 30, 2021, respectively. On January 1, 2021, 62,500 restricted stock awards were granted. The restricted stock awards vest in full on January 1, 2022. As of September 30, 2021, none of the restricted stock awards were vested. The fair market value of these awards was $4.57 per share. The company recorded $71,406 and $214,219 of compensation expense related to these awards during the three and nine months ended September 30, 2021, respectively.