CIRCLE8 Group Inc: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023, and related notes included elsewhere in this filing. This discussion and analysis and other parts of this filing contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this filing. You should carefully read the “Risk Factors” section of this filing to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this filing.

Overview

This overview and outlook provide a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report.

About SeqLL

We are an early commercial-stage life sciences instrumentation and research services company engaged in the development of scientific assets and novel intellectual property across multiple “omics” fields. We leverage our expertise with True Single Molecule Sequencing (tSMS) technology enabling researchers and clinicians to contribute major advancements to scientific research and development.

Our customers are primarily the early adopters of genomics technology and tSMS in academic research, biomarker discovery, and molecular diagnostic product development.

Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto within the Condensed Consolidated Financial Statements section of this report, and trends discussed in “Risk Factors” in Item 1-A of Part II of this report.

Proposed Merger Agreement

Terms used and not defined in the following discussion have the respective meanings set forth in Note 1 to our unaudited condensed consolidated financial statements included in Part I to this report.

On May 29, 2023, we entered into the Merger Agreement with Atlantic, Atlantic Merger Sub, SeqLL Merger Sub, Lyneer, and the Sellers subject to the approval of our stockholders at a special meeting, which approval has been obtained. Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Atlantic Merger Sub will initially be merged into Lyneer, and SeqLL Merger Sub will then be merged into Lyneer, with Lyneer continuing as the surviving entity and as our wholly-owned subsidiary. In connection with the consummation of the Merger, we will be renamed “Atlantic International Corp.”

Lyneer, through its subsidiaries, specializes in the placement of temporary and temporary-to-permanent labor across various industries within the United States. Lyneer primarily places individuals in accounting and finance, administrative and clerical, information technology, legal, light industrial, and medical roles. It is also a leading provider of productivity consulting and workforce management solutions. Lyneer is headquartered in Lawrenceville, New Jersey and has more than 100 locations in the U.S.

For further description of the terms of the Merger Agreement, please refer to Note 1 to the condensed consolidated financial statements.

Results of operations

We incurred net losses of $1,267,668 and $925,949 for the three months ended September 30, 2023 and 2022, respectively, and net losses of $4,386,148 and $2,858,818 for the nine months ended September 30, 2023 and 2022, respectively. We had negative cash flow from operating activities of $3,984,869 and $2,913,571 for the nine months ended September 30, 2023 and 2022, respectively, and had an accumulated deficit of $22,894,832 as of September 30, 2023.

Results of operations may be adversely affected by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, inflation, increases in interest rates, and geopolitical instability, such as the military conflict in Ukraine and the Israel-Hamas war. We cannot at this time fully predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively impact our business.

Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto within the Consolidated Financial Statements section of this report, and trends discussed in “Risk Factors” in Item 1-A of Part II of this report.

Comparison of the Three Months Ended September 30, 2023 and 2022

The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022:

Revenues

Our revenues during the three-month periods ended September 30, 2023 and 2022, were $0. The Company does not expect to recognize revenues until a market for its sequencing technology further develops.

Research and Development Expenses

Research and development expenses decreased by $17,439, or 4%, from $428,771 for the three-month period ended September 30, 2022 compared to $411,332 for the three-month period ended September 30, 2023. The slight decrease in expenses was a result of the Company’s cost saving efforts in order to ensure that the Merger with Lyneer can occur. The Company expects to continue to incur expenses of a similar amount until the closing of the Merger with Lyneer.

General and Administrative Expenses

General and administrative expenses increased by $387,883, or 79%, from $489,729 for the three-month period ended September 30, 2022 compared to $877,612 for the three-month period ended September 30, 2023. The increase was attributable to additional legal and accounting fees associated with the Merger. General and administrative expenditures will continue to increase until the closing of the Merger with Lyneer.

Other Income/Loss

We recognized $43,613 of investment income related to cash invested in money market accounts and cash that is held in investments that have a maturity date of less three months during the three-month period ended September 30, 2023 as compared to $9,981 of income earned from money market accounts during the three-month period ended September 30, 2022. This increase in investment income was attributable to additional funds being held within income generating bank accounts during the three-months ended September 30, 2023, as well as the rise in interest rates. The Company expects to continue to earn interest income associated with its funds held in money market accounts. Interest expense was comparable for the three months ended September 30, 2023 and 2022.

Net Loss

Overall, the net loss increased by $341,719, or 37%, to $1,267,668 as compared to $925,949 for the three-month period ended September 30, 2022, primarily due to increased expenses associated with the Merger in the three-month period ended September 30, 2023.

Comparison of the Nine Months Ended September 30, 2023 and 2022

The following table summarizes our results of operations for the nine months ended September 30, 2023 and 2022:

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Revenues

Our revenues during the nine-month period ended September 30, 2023, were $0 as compared to revenues of $78,659 during the nine-month period ended September 30, 2022, representing a decrease of $78,659, or 100%. During the nine-month period ended September 30, 2023, we had no revenues from product sales, grants or research services as compared to revenue in the same period of 2022 of $77,482 from grants and $1,177 of revenue related to product sales. The decrease in revenue was due to the fact that we do not currently have any active grants under which we are providing services. The Company does not expect to recognize revenues until a market for its sequencing technology is fully established.

Gross Profit

Gross profit for the nine-month period ended September 30, 2023 was $0, as compared to gross profit of $77,969 for the nine-month periods ended September 30, 2022, which represented a 100% decrease due to the fact that we did not have any revenue-generating transactions in the nine-month period ended September 30, 2023. The Company, similar to revenues, does not expect to recognize gross profit until a market for its sequencing technology further develops.

Research and Development Expenses

Research and development expenses increased by $640,484, or 57%, from $1,129,286 for the nine-month period ended September 30, 2022 compared to $1,769,770 for the nine-month period ended September 30, 2023. The increase in expenses was a result of our progressive return to research and development activities to pre-COVID-19 levels prior to entering into the Merger agreement with Lyneer. Going forward, we expect to incur less expenses related to research and development activities until after the closing of the Merger with Lyneer.

General and Administrative Expenses

General and administrative expenses increased by $1,021,065 or 60%, from $1,700,340 for the nine-month period ended September 30, 2022 compared to $2,721,405 for the nine-month period ended September 30, 2023. The increase was primarily attributable to approximately $475,000 in legal and professional fees related to the Merger, increased operating expenses of approximately $180,000 related to accounting, legal, insurance and audit related expenses, approximately $170,000 of additional incremental expenses incurred associated with the Merger with Lyneer, and approximately $78,000 related to the write-off of uncollectible receivables. General and administrative expenditures will continue to increase until the closing of the Merger with Lyneer.

Other Income/Loss

We recognized $167,018 of investment income, of which $106,051 related to investment income associated with marketable debt securities and $60,967 of investment income related to cash invested in money market accounts and cash that was held in investments that have a maturity date of less three months during the three-month period ended September 30, 2023 as compared to $0 of investment of income related to marketable debt securities and $18,457 of income earned from money market accounts during the nine-month period ended September 30, 2022. This increase in investment income was primarily attributable to the maturity of marketable debt securities during the nine-months ended September 30, 2023. We recognized $52,058 in net realized and unrealized losses on the marketable equity securities during the nine-month period ended September 30, 2022. We expect to continue to earn interest income associated with our funds held in money market accounts. Interest expense was comparable for the nine months ended September 30, 2023 and 2022.

Net Loss

Overall, the net loss increased by $1,527,330, or 53%, to $4,386,148 for the nine-month period ended September 30, 2023 as compared to $2,858,818 for the nine-month period ended September 30, 2022, primarily due to increased expenses associated with the Merger in the nine-month period ended September 30, 2023.

Liquidity and Capital Resources

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We experienced negative cash flows from operations of $3,984,869 for the nine-month period ended September 30, 2023, which included our costs and expenses related to the transactions contemplated by the Merger Agreement. As a result of our recent common stock offerings in August 2021 and February of 2023 and the maturity of our marketable debt securities, we had cash and cash equivalents of $3,727,154 at September 30, 2023. Therefore, we estimate that, if the Merger is not consummated and we no longer have the ongoing costs and expenses associated with that transaction, our available cash resources will be sufficient to fund our operations for at least one year from the date this report is filed with the SEC.

As of September 30, 2023, we had approximately $3.7 million in cash and cash equivalents. Since inception, we have funded our operations primarily through equity and debt financings, as well as from modest sales of products and research services. As of September 30, 2023, we had an accumulated deficit of $22,894,832.

On February 15, 2023, we issued 50,000 shares of common stock to investors at a price of $36.00 per share (after the Reverse Stock Split). The gross proceeds of the issuance were $1.8 million. We incurred offering expenses of approximately $0.3 million, which were paid with proceeds from the common stock issuance.

We believe the net proceeds from our February 2023 common stock issuance will enable us to fund our operations for at least one year from the date this report is filed with the SEC. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking estimate that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

Our future capital requirements will depend on many factors, including:

• our ability to successfully and further develop our technologies and create innovative products in our markets, including the costs associated with the development of our tSMS platform across multiple market segments, for which we have budgeted approximately $1.5 million in 2023 in support of our collaborative efforts in detection tools for heart disease and cancer, and chromatin mapping in genome biology,
• scientific progress in research and development of our collaborative programs, including the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights, as well as the costs associated with any product or technology that we may in-license or acquire; and
• the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; including the need to enter into other collaborations to enhance or complement our product and service offerings.

If the Merger is not consummated, we plan to continue seeking additional financing sources from time to time to meet our working capital requirements, make continued investment in research and development and make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. In addition, if we raise additional funds through further issuances of equity or debt securities, our existing stockholders could experience significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented.

Net cash used in operating activities

Net cash used in operating activities was approximately $3.9 million and $2.9 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in operating spending was a result of our progressive return to research and development activities to levels of pre-COVID-19 pandemic, prior to the announcement of the Merger. In addition, we experienced an increase in our general and administrative associated with legal, accounting, and consulting fees in connection with the Merger with Lyneer. The Company expects to continue to incur additional expenses until the closing of the Merger with Lyneer.

Net cash provided by investing activities

Net cash provided by investing activities was approximately $4.1 million and $3.4 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily attributable to the increase in sales and maturities of marketable securities during the nine months ended September 30, 2023 as compared to the nine month period ended September 30, 2022. The Company currently does not have investments in marketable securities, but instead will realize income from funds held in money market accounts until the conclusion of the Merger with Lyneer.

Net cash provided by financing activities

Net cash provided by financing activities was $1.5 million, and $0, for the nine-month periods ended September 30, 2023 and 2022, respectively. We issued 50,000 shares of common stock to investors at a price of $36.00 per share during the nine-month period ended September 30, 2023 (after the effect of the Reverse Stock Split). The gross proceeds of the issuance was $1.8 million. We incurred offering costs of approximately $0.3 million, which were paid with proceeds from the common stock issuance. No such transaction occurred during the nine-month period ended September 30, 2022.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, or ASU 2016-13. The guidance is effective for fiscal years beginning after December 15, 2022. We adopted this standard on January 1, 2023, which had no material impact on our condensed consolidated financial statements.

We do not believe that any other recently issued but not yet effective accounting pronouncements will have a material effect on the accompanying consolidated financial statements.

Critical Accounting Policies and Estimates

We prepare our financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect reported amounts. Estimations are considered critical accounting estimates based on, among other things, its impact on the portrayal of our financial condition, results of operations, or liquidity, as well as the degree of difficulty, subjectivity, and complexity in its deployment. Critical accounting estimates address accounting matters that are inherently uncertain due to unknown future resolution of such matters. Management routinely discusses the development, selection, and disclosure of each critical accounting estimates.

Other than those noted within Note 2 to our unaudited condensed consolidated financial statements, there have been no significant changes to our critical accounting policies and estimates during the three- and nine-month periods ended September 30, 2023 as compared to the information contained in our 2022 Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. Reference should be made to the consolidated financial statements and related notes included in the 2022 Form 10-K for a full description of other significant accounting policies.

JOBS Act

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

For as long as we remain an emerging growth company under the recently-enacted JOBS Act, we will, among other things:

• be permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;
• be entitled to rely on an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
• be entitled to reduced disclosure obligations about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and
• be exempt from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

We currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

Likewise, so long as we qualify as an emerging growth company, we may elect not to provide certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.

Evaluation of disclosure controls and procedures

Our Chief Executive Officer (who is our principal executive officer) and Chief Financial Officer (who is our principal financial officer), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2023. As of September 30, 2023, based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to reasonably ensure that designed control objectives are achieved. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

There have been no material changes to the risk factors set forth in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023 (our “Annual Report”), except for the risk factors relating to the Merger, the Merger Agreement and the Asset Sale Agreement set forth in our Information Statement dated August 10, 2023 filed with the SEC on August 10, 2023 (the “Information Statement”) and except as follows:

Our securities were recently delisted by Nasdaq and our failure to relist our securities in the future, could limit investors’ ability to effect transactions in our securities and subject us to additional trading restrictions.

As previously reported, on September 8, 2023, we received a letter from the Listing Qualifications Staff ( the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) regarding compliance with Nasdaq Listing Rule 5550(a)(4) (the “Rule”), which required us to have a minimum of 500,000 publicly held shares, exclusive of shares held by officers, directors and 10% stockholders. On November 10, 2023, we received a letter from Nasdaq advising us that in light of our inability to meet the requirements of the Rule by October 31, 2023, Nasdaq had determined to delist our securities from Nasdaq and suspend trading in those securities effective at the open of trading on November 13, 2023. The letter further advised that Nasdaq will complete the delisting by filing a Form 25 Notice of Delisting with the Securities and Exchange Commission, after applicable appeal periods have lapsed. We have appealed the decision of Nasdaq and paid the applicable filing fee for such appeal. On November 17, 2023, Nasdaq advised us that the decision to delist our securities will be reviewed by the Nasdaq Listing and Hearing Review Council, and that we may submit a memorandum in support of our appeal no later than December 1, 2023.

As previously disclosed, in connection with the transactions contemplated by the Merger Agreement, we have filed a registration statement on Form S-1 for the sale of our securities in connection with the closing of the transactions contemplated by the Merger Agreement. As previously reported, we had intended to cure our Nasdaq listing deficiency by consummating the transactions contemplated by the Merger Agreement and the proposed public offering by October 31, 2023. We have advised Nasdaq that we intends to proceed with such transactions and the proposed public offering of our securities and that we intend to relist our securities on Nasdaq in connection with the closing of such transactions and such public offering.

There can be no assurance that our re-listing application will be approved or that we will be able to relist our securities on the Nasdaq exchange. Even if our securities are listed on Nasdaq following the Merger, we may be unable to maintain the listing of our securities in the future.

If our re-listing application is not approved, there could be significant material adverse consequences to us, including:

• the possibility that Atlantic or Lyneer will terminate the Merger Agreement due to our failure to meet a material condition to the consummation of the Merger;
• a limited availability of market quotations for our securities;
• a limited amount of news and analyst coverage for our company; and
• a decreased ability to obtain capital or pursue acquisitions by issuing additional equity or convertible securities.

Our business involves significant risks. You should carefully consider the risks and uncertainties described in the Annual Report and the Information Statement, together with all of the other information in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as included in our Annual Report. The risks and uncertainties described in our Annual Report, the Information Statement and this report are not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.