UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-K

ANNUAL REPORT

ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933

For the fiscal year ended December 31, 2020

MONOGRAM ORTHOPAEDICS, INC.

(Exact name of registrant as specified in its charter)

In this report (the “Annual Report”), the term “Monogram Orthopaedics” “Monogram”, “we”, “us”, “our” or “the company” refers to Monogram Orthopaedics, Inc, and the term “Series A Offering” refers to the company’s Regulation A – Tier 2 offering of Series A Preferred Stock qualified by the SEC on September 20, 2019 and terminated on April 24, 2020, and “Series B Offering” refers to the company’s Regulation A – Tier 2 offering of Series B preferred stock qualified on January 15, 2021, and still ongoing as of the date of this Annual Report.

THIS ANNUAL REPORT MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE ANNUAL REPORT, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. 

Item 1. Business

Overview

Monogram Orthopaedics, Inc was incorporated under the laws of the State of Delaware on April 21, 2016, as “Monogram Arthroplasty Inc.” On March 27, 2017, the company changed its name to “Monogram Orthopaedics Inc.” Monogram Orthopaedics is working to develop a product solution architecture with the goal to enable mass personalization of orthopedic implants by linking 3D printing and robotics with advanced pre-operative imaging. The company has a robot prototype that can execute optimized paths for high precision insertion of optimized implants in synthetic bone specimens. These implants and cut-paths are prepared based on proprietary Monogram implant designs. Monogram intends to produce and market robotic surgical equipment and related software, orthopaedic implants, tissue ablation tools, navigation consumables, and other miscellaneous instrumentation necessary for the execution of reconstructive joint replacement procedures. The company has not yet made 510(k) premarket notification submissions or obtained 510(k) clearances for any of its product candidates. FDA approval is required to market our products and the company has not obtained FDA approval for any of its product candidates and cannot estimate the timing to obtain such approvals. While we are in the process of obtaining FDA approval of our product candidates, we intend to begin generating revenue through the sales of certain licensed products.

On February 24, 2020, the company executed an industrial net lease at 3913 Todd Lane in Austin, Texas, Suite 307, which serves as its headquarters. In the first year of the lease of Suite 307, the monthly base rent for the premises was $5,408.00 and increases to $5,909.47 in the fourth year. For the years ended December 31, 2020 and 2019, rent expense amounted to $80,762 and $28,465, respectively. On January 25, 2021, Monogram executed an amendment to its industrial net lease at 3913 Todd Lane Austin, Texas to expand the premises to include an additional suite (Suite 107). The additional premises are approximately 1,952 square feet and the lease term remains from March 1, 2020 to March 31, 2024. In the first year of the lease, the monthly base rent for the new premises is $2,680, and it increases to $2,843 in the third year.

Our Background

Our company’s business is based on ideas formulated by Dr. Douglas Unis, an Associate Professor of Orthopaedic Surgery, and technology developed by Dr. Unis, Professor Anthony Costa, the head of the Neurosurgery Simulation Core, and Sulaiman Somani, a medical student at the Mount Sinai School of Medicine (“MSSM”).

Our founding philosophy is that advances in technology will usher in new way of thinking about reconstructive joint procedures and orthopedic implants. We believe that the future of orthopedic joint replacements lies in build-to-order, press-fit patient optimized implants that are inserted into bone cavities prepared by high precision robotic tools and that rely on natural biologic fixation rather than cement. We believe that to facilitate the cost-efficient delivery of anatomy restoring patient optimized implants it is necessary to develop efficient processes for designing and fabricating implants and surgical plans. We also believe that to prepare the surgical plans and execute the robotic procedures advanced imaging such as a CT scan or MRI are required. Patient optimized implants require high-precision bone preparation that moves beyond two dimensional planar cuts or alignment, for example. It is our assessment that for these processes to be truly scalable they require a high degree of optimization and a high functioning navigated surgical robot capable of executing complex cutpaths; i.e. a product solution architecture with image processing, scalable customized implant design, pre-operative planning, and robotic execution.

It is our view that press-fit 3D printed patient optimized implants that rely on biologic fixation will prove to be clinically superior over the long term while also alleviating the tremendous inventory burden and capital inefficiencies of generic implant distribution. We believe that implants should be designed and optimized to fit and restore a patient's anatomy and that the ability of a robot to execute irregular cuts could exceed the capabilities of even the most skilled surgeons. Monogram believes that the use of patient specific implants and robotic surgery will, over time, reduce complication, failure rates and reduce costs considerably.

Principal Products and Services

Monogram’s primary business will be to design and manufacture optimized total knee replacements, and eventually, if we are successful at commercializing our total knee replacement and have sufficient capital and market interest, hip, knee, shoulder and extremities implants using primarily 3D printed manufacturing as well as the equipment required for insertion, including:

The Monogram robotic system and related hardware (optical tracking equipment, end-effector, etc.) are multi-use capital equipment. To properly use the robotic system, Monogram’s pre-operative planning software, robotic controls and intra-operative software are needed. This software will be subject to an annual license, fees for which will be based on the scope of use (for example total knee arthroplasty). Each clinical application will be billed separately. During the procedure, a mix of re-usable and single use instrumentation is needed. The elements of our system are sold separately but generally must be used with the system to properly perform its intended clinical function.

A significant percentage of orthopaedic medical devices are outsourced to original equipment manufacturers (OEMs). Monogram intends to outsource the manufacture of its products (including implants and instrumentation needed to execute reconstructive joint replacements) to established suppliers that may already be approved suppliers for the most significant market participants and may have decades of product-specific manufacturing expertise. 

According to analysis conducted on orthopaedic procedures, as of 2019 the average cost of implant components for total hip procedures was approximately $5,004 and for primary total knee procedures $4,325. Monogram expects to price our products consistent with the market. We believe we are on track to be the first company to market with an active milling navigated robot arm with 3D printed patient-optimized implants.

Near Term Revenue Sources

To provide a source of revenue to the company prior to FDA approval of its principal products, the timing of which such approvals cannot be estimated by management, we intend to act as a distributor, licensing and selling other companies already FDA-approved products.

On July 1, 2020, the company entered into a non-exclusive licensing and distribution agreement with a medical technology company of an FDA approved total knee system. The agreement allows Monogram to market and sell this total knee system manufactured by this medical technology company anywhere within the United States. The initial term of this agreement is ten (10) years, with additional one-year optional renewals following the initial term (unless the agreement is earlier terminated, which may only occur upon a breach by one of the parties to the agreement, or for cause). As part of this licensing and distribution agreement, Monogram and the medical device company agreed that the Senior Director of US Sales of this medical device company would be released as an employee of that company to join Monogram as an employee. That employee has since joined Monogram as its Sales Manager for the South East Region. As part of this agreement, the company placed an initial purchase order for inventory totaling approximately $500,085. There is no minimum purchase amount required by the licensing and distribution agreement. As of the date of this Annual Report, the company has made this purchase and intends to sell these purchased products in 2021. 

In September 2020, Monogram executed standard sales agent agreements with two independent orthopedic distributors to market the products licensed pursuant to the aforementioned licensing and distribution agreement with surgeons in select territories. These sales agency agreements each have two (2) year terms, and may be terminated only in the event of a breach by Monogram or the applicable sales agents. As compensation for their services, the sales agents will receive commissions equal to 25% of the net sales generated on sales of any of Monogram’s products and related instruments made by such agents.

Monogram entered into these sales agent agreements for purposes of assisting Monogram in marketing and selling the total knee system it licensed pursuant to the licensing and distribution agreement. As of the date of this Annual Report, Monogram has received interest from a hospital for these licensed products, and expects that it will begin making sales and generating revenues from the sales of these products before the end of 2021.

Monogram believes that acting as a distributor for third-party products will ultimately benefit the company if and when the FDA approves its 510(k) submissions for its novel Monogram products. Monogram cannot estimate the timing of any such FDA approvals or whether such FDA approvals for its novel Monogram products shall be granted. Monogram intends to utilize the sales channels and network it is currently establishing for these licensed products for its own novel products in the future, assuming they obtain FDA approvals which may not be granted and the timing of which is uncertain. Further, Monogram intends to integrate certain components of the total knee system (consisting of a tibial component, a femoral component, a patellar component, a locking mechanism, and inserts) into its own novel knee system (which it will ultimately file as a 510(k) submission to the FDA). While we could have developed these components ourselves, we believe it is advantageous to integrate certain existing clinically established components into our novel knee system.

Monogram may seek to act as a distributor for products of other FDA registered ISO 13485 approved suppliers with the proper Quality Management Systems and product specific expertise if it determines there may be a market opportunity for such products.

Market

According to sources and analysis trusted by management, the orthopaedic devices market is considered to be highly concentrated, with the top seven market participants accounting for almost 65% of total sales as of 2019. The joint reconstruction devices market, which will be Monogram’s primary target market, reconstructive joint replacements, is even more concentrated with the top four market participants accounting for approximately 73% of sales for the total market. The knee market segment is even more consolidated with the four most significant players controlling 82% of the market and no other company controlling more than 2.2%. The total joint replacement devices market as of 2019 was approximately $19.6 billion globally. In the United States, the number of hip replacement procedures was estimated to be to 669,100 and the number of knee replacements was estimated to be 1,059,200 in 2019.

Most patients who undergo reconstructive joint replacement surgeries are aged between 50 and 80 years old, with the average patient age for hip and knee replacements around approximately 65 years of age. Many of these patients rely on third-party payors, principally federal Medicare, state Medicaid, and private health insurance plans, to pay for all or a portion of the costs and fees associated with joint replacement surgeries.

According to the orthopaedic industry statistical analysis and research, the reconstructive joint replacement market is expected to grow at an annual rate of between 3 and 4 percent with growth driven primarily by an aging population, the obesity epidemic and developments in advanced materials that have improved the longevity of implants and their efficacy for younger patients which grows the patient candidate pool. The fastest-growing patient demographic are patients aged 45 to 54 years of age. It should be noted that COVID-19 has had a significant and material adverse impact on the orthopedic market that will likely result in permanent demand destruction. These market growth estimates may not properly factor in the effects of the COVID-19 crisis, and management expects that the market for orthopaedic procedures could shrink and that the adverse impacts could last for an extended period.

Management believes that the market for robotics and surgically prepared press-fit implants will outpace broader market growth primarily because of the limited market penetration and observed growth of the Stryker Corporation, which utilizes navigated robotics and press-fit implants. In particular, management has paid close attention to Stryker’s performance in the CT based robotically prepared press-fit knee market. Stryker’s $241.6M year-over-year revenue growth in joint replacement sales from 2018 to 2019 was approximately 2.5 times as much as Zimmer Biomet, Depuy Synthes and Smith & Nephew year-over-year revenue growth combined. The Stryker Corporation markets the MAKO, a robotic-arm assisted technology that uses a CT-based preoperative plan to help surgeons provide patients with a personalized surgical experience. From 2018 to 2019, the Styker Corporation increased sales in its knee segment by 7.7%. Monogram believes this growth indicates low penetration of press-fit knees as a percentage of Total Knee Replacements.

According to Millenium Research Group, as of 2018, Stryker had 86.7% Large-joint Replacement Robotic System Revenue Market Share and the next largest competitor was OMNIlife Science (acquired by Corin) with 6.8% market share. Management believes that this sales outperformance of over 12-to-1 may speak to distinct technological advantages of the Stryker robotic system. The Stryker Mako robot is currently the only robot on the market that uses a CT-based planning approach combined with a navigated multi-joint cutting arm that features an integrated cutting tool.

According to sources and analysis trusted by management, less than 10% of knees are uncemented. The Stryker Corporation has indicated in a Company Conference Presentation on February 27, 2019 at the SVB Leerink Global Healthcare Conference, that there are 5,000 orthopaedic hospitals in the US, the majority of which they think would be a candidate for at least one robot. As of Q4 2019, the Stryker Corporation had approximately 700 robots installed in the US. According to another source trusted by the robotic assisted procedure growth rate in knees may be as high as 29.2% compounded annually over the next 7 years. Monogram management believes that robot penetration and the use of surgical robots for bone preparation of press-fit implants remains low. This is, in part, why management believes it is in the best interest of the company to simultaneously pursue the development of a novel press-fit knee that can be inserted with a robotic system.

Management believes that optimized press-fit (also “uncemented”) implants combined with navigated robotic insertion will grow, driven by an industry focus on normalizing patient outcomes and efforts to mitigate clinical risk and improve productivity (one of the potential benefits of not using bone cement). At the same conference, the Stryker Corporation described the limitations of cement; handling time, set-up time, odor related to it, and most significantly, leaving behind another foreign body that can degrade over time and cause implant loosening. Monogram’s implants will not utilize bone cement, which we believe provides an opportunity for us to disrupt this market, especially when combined with a surgical robotic system. With the technology and product infrastructure we are developing, we believe we may be in a prime position to capitalize on this growing market. Because press-fit implants rely on natural biologic fixation rather than cement, the initial stability of the implants may be important to facilitate proper osteointegration and long-term stability. Management believes that these types of implants are well suited for a surgical robotic system capable of executing high accuracy cuts.

Competition

We face competition from large, well-known companies in the medical device industry as a whole, as well as specifically in the orthopaedic medical device industry. Currently, the top five market participants in the joint replacement devices market are Zimmer Biomet Holdings, Inc., DePuy Orthopaedics, Inc., a Johnson & Johnson company, Stryker Corporation, and Smith & Nephew, Inc. These companies dominate the market for orthopaedic products. These companies, as well as other companies like ConforMIS, Inc., offer implant solutions, including (depending on the competitor) a combination of conventional instruments and generic implants, robotics and generic implants, or patient-specific instruments (“PSI”) and cemented patient-specific implants for use in conventional total and partial orthopaedic replacement surgeries.

Relevant technical considerations for the evaluation of orthopaedic surgical robotics include:

Currently, we are not aware of any widely commercialized orthopaedic companies that broadly offer robotic technology in combination with surgical navigation for the insertion of patient-specific press-fit orthopaedic implants. To our knowledge the only use of robotic technology in combination with surgical navigation is for the insertion of generic orthopaedic implants. These competitors and other medical device companies have significant financial resources. They may seek to extend their robotics and orthopaedic implant technology to accommodate the robotic insertion of patient-specific implants. A number of these and other companies also offer surgical navigation systems for use in arthroplasty procedures that provide a minimally invasive means of viewing the anatomical site.

Our Innovative Approach

Monogram’s principal innovation over our competition will be our ability to produce robotically inserted press-fit orthopaedic implants rapidly and at scale. The product solution architecture that we are developing may enable the rapid fabrication of optimized robotically inserted orthopaedic implants.

The Monogram technology platform consists of a workflow to designate optimized press-fit implants from patient-specific CT scans, and integrate into a workflow for robotic execution. We seek to optimize the design and insertion of press-fit implants using data from raw CT images. The navigated robot is designed to execute cut paths that may be optimized for time to surgically prepare the corresponding cavities to facilitate high-precision insertion of the implants.

We believe that Monogram’s navigated robot features several enhancements that may enhance the user experience as compared to the current robots in use. The robot features seven degrees-of-freedom with control algorithms that leverage the kinematic redundancy of the arm to avoid interoperative boundaries and optimize the surgical execution. The company is exploring methods of tracking objects that may be of clinical significance that may not be visible from CT images. Monogram is also working on trying to reduce surgical time and improve the accuracy of execution to the greatest extent possible. For example, the company is researching the accuracy of various cutting instruments to determine if, for instance, a mill can prepare cuts with greater precision than a saw in a time-efficient manner. The management team believes that a highly dependable robot that reduces surgical time while executing high accuracy cuts is the highest priority for successful market adoption.

Press-fit orthopaedic implants are generally understood to perform better when high initial stability is achieved. Stability may depend on design features and a tight fit. It is not always straightforward to design implants that can be both easily inserted and removed while remaining highly stable. The Monogram press-fit implants are designed such that cortical contact, and therefore stability, are maximized while remaining insertable. The Monogram implants are designed to reconstruct the native patient anatomy as closely as possible. A challenge with press-fit orthopaedic implants is also removal. Implants that become infected may need to be removed. Monogram is working on trying to develop highly stable implants that can also be easily removed without causing significant damage to the remaining bone.
 

With generic implants in hips, for example, manual bone preparation can contribute to periprosthetic fracture, dislocation, leg length inequality, subsidence and early loosening, and suboptimal function outcomes. With generic knee implants, aseptic loosening of the tibial component and malalignment can be reasons for failure. Current hip stems, for example, can have limited options to restore anatomy. For instance, most implants are available in only two widths despite wide human anatomic variations. Generic implants can be geometric as opposed to organic in shape, which limits the amount of direct bone contact required for initial stability and long-term biological fixation. There is currently no commercially viable way to produce implants matching both the internal bone cavity and the external biomechanics of the joint. The challenges of designing implants that restore anatomy, are highly stable and easily revisable are significant. There are currently limited methods for precisely sculpting an implant’s exact complement in the bone.

Our surgical approach will attempt to use additively manufactured (AM) press-fit tibial knee implants that will require robotically milled complementary cavities to be insertable. For our first-generation products, we will be combining a novel Monogram tibial design with a licensed generic femoral implant, inserts, and locking mechanism to try to reduce the initial complexity of the development. To try and reduce the regulatory risk, we will be making the first-generation implant insertable with manual instrumentation as well as robotically so that the implant and robot can be submitted to the FDA as separate submissions. Monogram is a pre-commercialization company that has not yet validated our manufacturing method or the clinical efficacy of our products. The scope of development and capabilities may be affected by our ability to commercialize certain aspects of our technology. The commercial implementations of our designs may differ considerably from the initial design concepts. For example, cutting titanium is challenging and may require design adjustments. The goal of our implants is to more accurately restore patient anatomy and mitigate some of the potential causes of failure described above. We have conducted preliminary testing that we interpret to be supportive of our hypothesis that more accurate restoration of patient anatomy and robotic insertion of patient-specific implants improves initial stability, and we believe to warrant further research. We will continue to focus our development efforts with a focus on high accuracy robotic execution, and implant design. Our testing will likely include comparisons with implants that may represent the existing standard of care as a benchmark to try and demonstrate that the initial stability of our implants shows less micromotion than their generic counterparts.

Furthermore, validation of the mechanical strength of our products is critically important to our success. In addition to stability testing, our R&D efforts will also test the mechanical strength requirements mandated by the FDA. Considerable work remains to validate our implant design. Robotic bone preparation for the insertion of implants is challenging and requires many technical steps; for example, the robot must be properly calibrated, the patient bone must be accurately correlated to the pre-operative plan, the robotic arm control must efficiently execute the plan, etc. There are numerous sources of error that make it challenging to prepare cavities with sufficient accuracy. Our robot, the KUKA LBR Med, has never been used for this application. We have found that to make cavities in simulated bone specimens for the insertion of our implants is highly challenging. We have not yet achieved high accuracy cuts in a cadaveric bone specimen. Also, our robotic execution is currently more time consuming than manual insertion methods. The added time to register the bone and to robotically execute the cuts is a disadvantage of our system. While our system has performed well in synthetic bone specimens in the past, we need to prove commercial feasibility in a range of human bones to test our ability to produce corresponding implants and cavities.

Management believes that the Monogram equipment may be cheaper and more capital efficient than traditional knee and hip replacement systems. For example, the Mako robot produced by Stryker Corporation (Ticker: SYK) is the dominant leader in navigated surgical robotics with 700 robots installed globally, based on public information from a Q4 2019 Stryker Corp Earnings Call. Further, public information from a Q3 2018 Stryker Corp Earnings Call, Stryker established that it was selling its Mako robots for $1,000,000 while reporting gross profit margins on its robot sales of 62%. Our management believes that this could imply a production cost of approximately $380,000 per robot. We estimate the cost to produce our robotic system will be below this cost. Investors should note, our assumptions about the production costs of Stryker may be inaccurate, or may not be current. Furthermore, management would expect that any competitors in the market with competitive offerings would be in a better position to discount their products than Monogram because they are larger and more established companies. We do not anticipate that reducing the capital required to distribute our products will have a material impact on demand for our products.

Sales & Orders

The specific sales process for each of our product categories is as follows:

Surgical Robot with End-Effector

Generally, the company must identify a surgeon within the organization willing to advocate for the purchase of the capital equipment to the hospital. Orders are placed by hospital finance and buying departments in advance of any surgical procedures. Cost is often a significant objection to purchase. Monogram intends to address this objection by offering high performing equipment at a price that is competitive with other market participants. Some of Monogram’s competitors offer hospitals financing options for large equipment purchases. Monogram will explore offering financing options. Investors should note that Monogram may incur losses from the initial placement of robotic systems at discounted prices.

Monogram intends to distribute its products initially through independent distributors and contractors. We will be making efforts to secure contracts with national Group Purchasing Organizations, although we cannot guarantee favorable agreements will be secured. Monogram will also likely sell service contracts and extended warranties.

Cutting Tools and Navigation Consumables

Consumable equipment is generally billed on a per-use basis and associated with the specific surgical case for which they were used. The hospital takes stock of consumed materials which are billed by Monogram.

Technology Platform

Monogram will license its technology platform to hospitals, which will provide those hospitals with access to Monogram’s surgeon planning portal. The motion control and intra-operative control algorithms are embedded as part of the robotic surgical system.

Implants

Monogram will receive orders for implants through the Monogram technology platform. The hospital will generally aggregate the materials used in a given surgical case, which are billed by Monogram.

We intend to attend various orthopaedic trade shows and marketing events in 2021 to showcase our product pipeline in an effort to promote interest in our Company. One of the largest industry events is the American Academy of Orthopaedic Surgeons, scheduled to occur from August 31, 2021, to September 4, 2021, at the San Diego Convention Center. Monogram has applied for a booth at this event.

Design

The Monogram press-fit implant designs seeks to try to optimize for initial stability. Monogram uses raw CT images to guide this process. Monogram utilizes technology to determine the implant designs that are sent to a manufacturer to produce. Monogram may combine specific existing generic implant components with specific proprietary monogram components. For example, for knees, we may combine our tibial component with a generic locking mechanism, insert, and femoral component. For hips, we may combine a Monogram hip stem with other generic components of the total hip implant system, such as the head, liner, and acetabular cup. Monogram will be producing a proprietary tibia, but the other components of the total knee replacement (femoral implant and plastic insert) may be standard. For the first generation Monogram knee, we will not develop a custom femur or inserts. Monogram is focusing its development efforts only where management believes there is a clear potential to drive clinical benefit from technology advances.

Monogram’s other products are pre-designed, and therefore will only require manufacture and distribution to reach the end-customer.

Manufacturing

The implant designs generated with the Monogram technology will be 3D printed out of titanium. Our titanium implants will be a biocompatible medical-grade titanium alloy with a chemical composition corresponding to ISO 5832-3, ASTM F1472, and ASTM B348. Our implants will either be manufactured by an established ISO13485 contract manufacturer or the medical technology partner from which we have licensed certain implant components. The company is in discussions with development and manufacturing companies for these services.

Manufacturing of our surgical robots, navigation consumables, and cutting tools will be outsourced to well-established FDA registered ISO13485 approved manufacturers with proven quality management systems. Our robot arm is the LBR Med, which is manufactured by the KUKA Robotics Corporation.

Quality Control and Dispatch

Our proposed distribution model contemplates using a distribution facility to ship our products to customers. Such facilities will receive final products from our suppliers that have been approved by their respective quality management systems. Our distribution facility will then conduct a final inspection of the products, and, once approved, ship them to our customers. Our distribution facility may assemble or repackage certain of these components for shipment.

Our Market

We intend to market our products to orthopaedic surgeons, hospitals (or other medical facilities), and patients. Our ideal customers are hospitals in high population metropolitan regions that tend to employ high-volume technology-focused surgeons.

Through the use of direct sales representatives, independent sales representatives, and distributors, we intend to market and sell our products in the United States and over time in other markets if we are able to scale operations in the United States successfully. We intend to try and enter contractual arrangements with national Group Purchasing Organizations that may contract with hospitals to source products.

Research and Development

The company currently has several Research and development (“R&D”) initiatives underway. These initiatives include micromotion studies of press-fit knee implants, testing of a hybrid knee that combines generic femoral components and locking mechanisms, cadaveric testing and performance testing of a robot mounted navigation system. We currently have six (6) robots and eleven (11) navigation systems used for R&D initiatives. In addition Monogram is testing novel methods of registration and tracking. Much of our current research also relates to improving the accuracy of robotic execution with a focus on arm calibration and control as well as navigation. R&D amounted to $1,599,960 and $194,287 for the years ended December 31, 2020 and 2019, respectively. In 2018, the majority of our R&D expenses were related to costs incurred developing and testing our patient-specific hip implant for initial stability with the UCLA Orthopaedic Biomechanics Laboratory. In 2019, the majority of our R&D related expenses were related to research and testing of our patient optimized tibial component with the Orthopaedic Biomechanics and Advanced Surgical Technologies Laboratory at the University of Nebraska Medical Center and the development of our navigated robotic system. The majority of our 2020 R&D expenses were in connection with several R&D initiatives underway, including testing configurations of our press-fit knee implants to optimize stability, testing alternative methods of robotic navigation, testing and optimizing cutting instrumentation and tooling, and performance testing of our surgical robot and related surgical workflows. We expect to continue spending at elevated levels on R&D as we continue our development. We intend to continue our research such as cadaveric studies of our knee implants for both robotic and manual placement, development of our surgical navigation systems, development of our guidance applications and continued development and testing of our implants.

The company has installed a 352 square foot cadaver lab in its Austin facility to support the research and development initiatives of the company. The cadaver lab has a dedicated surgical robot and navigation system that can be used to support testing and product development. Monogram currently has 5 surgeons under contract to support our engineers with subject matter expertise, design input, and testing services. In October 2020, we held our very first successful cadaver lab test with members of our surgeon panel. The design for our first-generation implant is largely finalized and the company has formally started development.

While our initial focus is total knee replacements followed by partial knee and hip replacements, we are actively investigating shoulders, ankles, and spine applications for our technology as well. We have not expended any material amount of funds on these investigations, and have not begun development on any products related to shoulders, ankles, or spine treatments.

Employees

The company currently has 18 full-time employees, 15 of which are expected to work out of our headquarters at 3913 Todd Lane, Suite 307, Austin, TX 78744. Due to the COVID-19 pandemic, 3 of our full-time employees that were expected to relocate have been unable to relocate to Austin, TX.

Advisors

Monogram has recruited six practicing surgeons to support our development and validation efforts and provide practical user input. These surgeons that are currently practicing at orthopedic centers such as The Orthopedic Specialty Center of Northern California, Orthopaedic Specialists of Austin, and Columbia University. These advisors are engaged pursuant to consulting agreements. The terms of these agreements vary on a case-by-case basis, but in general, advisors receive hourly cash compensation (approximately $400 per hour) and stock options for their services to our company. Advisors agree to provide a minimum number of hours of service to Monogram per year on a case-by-case basis. Monogram retains the rights to any work-products (intellectual property or otherwise) created by these advisors. These advisors are not employees of Monogram.

Regulation

Medical products and devices are regulated by the Food and Drug Administration (the “FDA”) in the United States and can be regulated by foreign governments for devices sold internationally. The Federal Food, Drug, and Cosmetic Act and regulations issued by the FDA regulate testing, manufacturing, packaging, and marketing of medical devices. Under the current regulations and standards, we believe that our products and devices are subject to general controls, including compliance with labeling and record-keeping rules. In addition, our medical devices require pre-market clearance, which for our products and devices will require a 510(k) premarket notification submission.

Further, our manufacturing processes and facilities are also subject to regulations, including the FDA’s QSR requirements (formerly Good Manufacturing Practices). These regulations govern the way we manufacture our products and maintain documentation for our manufacturing, testing, and control activities. In addition, to the extent we manufacture and sell products abroad, those products are subject to the relevant laws and regulations of those countries.

Finally, the labeling of our products and devices, our promotional activities and marketing materials are regulated by the FDA and various state agencies. Violations of regulations promulgated by these agencies may result in administrative, civil, or criminal actions against our manufacturers or us by the FDA or governing state agencies.

As of the date of this Annual Report, Monogram has not yet received clearance to market its products in the United States (FDA) or internationally, and as such is not currently selling and distributing any products. Monogram has engaged a regulatory consulting group, “Musculoskeletal Clinical Regulatory Advisers, LLC” to assist with its 510(k) premarket notification submission for our system of products and technology. Management believes it is in the best interest of the company to pursue separate regulatory submissions for the robot and implants. For details on our anticipated timelines for 510(k) premarket notification submissions to the FDA, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Plan of Operations and Milestones” in this Annual Report.

Intellectual Property

The majority of our patents or trademarks are licensed from Mount Sinai.

The following patents have been issued:

The following patent applications are currently under review:

Additionally, the company has developed its own intellectual property, which would not require a license from Mount Sinai. Information on patent filings by the company are included below:

On March 25^th, 2019, Monogram instructed the law offices of Heslin Rothenberg Farley & Mesiti P.C. to conduct a Freedom to Operate (FTO) search on certain embodiments of Monogram’s knee design and robotic surgical approach. The goal of this FTO is to establish the ability of our company to develop, make, and market products utilizing our knee design and robotic surgical approach without legal liabilities to third parties (e.g., other patent holders). Management of Monogram believes the results from this FTO search are favorable to the company with respect to risk of third-party IP litigation against the company, but there is no guarantee that our view is correct in this regard.

Software License

On April 16, 2021, Monogram licensed certain proprietary software and technology assets for a one-time fee in the amount of $625,000 from a surgical robotics company. On April 22, 2021, Monogram licensed certain proprietary software and technology assets for a one-time fee in the amount of $350,000 from the same surgical robotics company. Each of these licenses required only the one-time payments listed above, and provided Monogram with a worldwide, non-exclusive license to use the licensed technology and software in perpetuity.

Prior to licensing these software and technology assets, Monogram had been internally developing similar software and technology assets for its own surgical robotic platform and surgical workflow. However, Monogram believes that licensing this software and technology provides a quicker and more efficient solution than developing similar technology in-house. The former CTO of the same surgical robotics company joined Monogram as the VP of Engineering on April 5, 2021. 

Acquisition Opportunities

We do not have any current plans to acquire the assets or operation of other entities, but we believe that opportunities may become available. Should there be an opportunity to make an acquisition, our goal would be to ensure that the assets or operations to be acquired are a good fit, and the acquisition terms are in line with the benefits to the company. Acquisitions would likely be in the form of cash and equity. The cash portion of any acquisition would likely come from obtaining financing from lenders or future equity financing rounds, neither of which have been identified. Such financing would require that the company take on new expenses related to either the servicing of new debt or broker commission fees. Any equity used for an acquisition would come from issuing additional shares of the company’s stock in exchange for the stock of the acquired entity. The issuance of stock would likely occur in a transaction that is not registered with the Securities and Exchange Commission and could result in the dilution of the investors in the the Series A and/or Series B offering. Additionally, investor consent would not be sought if the company had sufficient authorized shares available.

Litigation

From time to time, the company may be involved in a variety of legal matters that arise in the normal course of business. The company is not currently involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of its business activities, or otherwise.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations for the fiscal years ended December 31, 2019 and December 31, 2020 should be read in conjunction with our financial statements and the related notes included in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Overview

Monogram Orthopaedics, Inc was incorporated under the laws of the State of Delaware on April 21, 2016 as “Monogram Arthroplasty Inc.” On March 27, 2017, the company changed its name to “Monogram Orthopaedics, Inc.” Monogram Orthopaedics is developing a product solution architecture with the goal to enable mass personalization of orthopedic implants by linking 3D printing and robotics via automated digital image analysis algorithms. The company has a robot prototype that can execute optimized paths for high precision insertion of optimized implants in synthetic bone specimens. These implants and cut-paths are prepared based on proprietary Monogram designs. Monogram intends to produce and market surgical robotic equipment and related software, orthopaedic implants, tissue ablation tools, navigation consumables and other miscellaneous instrumentation necessary for the execution of reconstructive joint replacement procedures.

Results of Operations

Year ended December 31, 2020 Compared to Year ended December 31, 2019

The company is in an early stage of development.  The company did not generate revenues for the years ended December 31, 2020 and 2019.

Our costs and expenses primarily consist of the categories outlined below, and totaled $6,850,738 for the year ended December 31, 2020 compared to $1,676,695 for the year ended December 31, 2019, a significant increase, primarily due to the following factors:

Other expenses increased to $2,217,268 for the year ended December 31, 2020 from $119,570 for the year ended December 31, 2019. This significant increase was primarily due to:

As a result of the foregoing, the company generated a net loss of $9,068,006 for the year ended December 31, 2020 compared to a net loss of $1,796,265 for the year ended December 31, 2019.

Liquidity and Capital Resources

At December 31, 2020 the company’s cash on hand was $5,586,748. The company is not generating revenues and requires the continued infusion of new capital to continue business operations. The company has recorded losses since inception, and as of December 31, 2020, had positive working capital of over $3 million, and a stockholders’ equity of $4,989,432. The company has historically been capitalized by contributions from related parties and its officers and directors. More recently, it has raised capital through securities offerings. The company plans to continue to try to raise additional capital through crowdfunding offerings, equity issuances, or any other method available to the company. Absent additional capital, the company may be forced to significantly reduce expenses and could become insolvent.

The company estimates that the proceeds raised from the Series A Offering and Series B Offering can continue to fund the company’s current rate of operations through 2021 without raising additional capital. However, the company has determined that additional capital raising activity will be beneficial for enhancing the operations of the company.

Issuances of Equity

On September 20, 2019, the company commenced an offering under Regulation A under the Securities Act of 1933 pursuant to which it offered shares of its Series A Preferred Stock (the “Series A Offering”). On March 17, 2020, the company filed a 253G2 supplement in connection with the Series A Offering, indicating that the company intended to terminate the Series A Offering on April 24, 2020. The Company raised gross proceeds of $14,568,568 from the Series A Offering.

On January 15, 2021, the SEC qualified an offering of its Series B Preferred Stock, in which Monogram is currently seeking to raise up to $30,000,000 from the issuance of Series B Preferred Stock (the “Series B Offering”). As of December 31, 2020, Monogram has raised $0 in gross proceeds from this offering. As of the date of this Annual Report, it has raised total gross proceeds of approximately $5,338,234 from this offering.

Issuances of Convertible Notes

Since inception, the company has funded operations through the issuance of equity securities and convertible notes. During the years ended December 31, 2019 and 2020 the company did not have any convertible promissory note issuances that resulted in proceeds to the company. In February 2019, the company issued a convertible promissory note to Benjamin Sexson, the company’s CEO, in consideration for deferred compensation in the amount of $48,000 that were converted into convertible notes. The company did not receive any proceeds from issuances of Common Stock in 2020. The company received cash proceeds of $489 from the issuance of shares of Common Stock to its Chief Executive Officer in 2019. As described above, the company sold shares of Series A Preferred Stock in the Series A Offering in 2019 – see “Liquidity and Capital Resources”.

In 2020, all previous outstanding convertible notes of the company issued between 2017 and 2020 either converted into Series A Preferred Stock of Monogram or were repaid. The Company has no outstanding convertible notes as of the date of this Annual Report.

Indebtedness

Since inception, the company has entered into convertible notes in the combined principal amount of $2,124,000. Convertible notes comprising $1,830,000 of the $2,124,000 bear interest at 6% per year. Convertible notes comprising $294,000 of $2,124,000 bear interest at 4% per year. The combined principal amount and the accrued interest of these notes was $2,329,719 as of December 31, 2019. On April 29, 2020, the company repaid a note payable to Pro-Dex, Inc. in the amount of $934,866.67, reducing this total balance. The remaining balance of these notes was represented by notes that were subject to mandatory conversion upon closing of an equity financing in which the company issues and sells shares of its Preferred Stock for gross proceeds equal to or exceeding $5,000,000. These notes were previously filed as exhibits to the company’s Form 1-A filed on September 10, 2019. On April 23, 2020 the company triggered this conversion from sales of its Series A Preferred Stock in the Series A Offering, resulting in aggregate gross proceeds to the company of $5,057,772 as of the same date. As such, as of the date of this Annual Report, these notes are no longer outstanding. A total of 255,417 shares of its Series A Preferred Stock have been issued to the noteholders for the conversion of their notes.

As of December 31, 2020, the company had $3,126,456 in total liabilities, consisting of operating lease liabilities of $57,544 (current) and $147,944 (long term) and trade accounts payable of $182,815.

During the year ended December 31, 2020, the company received forgiveness of a $79,025 Payroll Protection Program (PPP) loan from the U.S. Small Business Administration that carried an interest rate of 1%, had a two-year term with no principal payments for 12 months.

As of December 31, 2019, the company owed Pro-Dex, Inc. notes payable of $800,000 and accrued interest payable of $117,295. In April 2020, the company paid off this note in full, consisting of $800,000 in principal and $134,867 in accrued interest. Pro-Dex, Inc. also holds anti-dilutive warrants for which the company has recorded a warrant liability of $2,523,797 as of December 31, 2020.

The company owed Doug Unis, a board member of the company, $71,000 in notes payable and $5,969 in accrued interest at December 31, 2019, that was discharged in full in April 2020 by the issuance of 71,307 shares of the Company’s Series A Preferred Stock.

The company owed its Chief Executive Officer $214,356 in salary and bonus payable at December 31, 2020. As of the date of this Annual Report, this amount has not yet been repaid to the Company’s CEO.

The company currently has no material commitments for capital expenditures.

Trend Information

Our primary addressable market is for knee procedures, specifically primary Total Knee Arthroplasty (“TKA”) procedures (Monogram has a novel Total Hip Arthroplasty (“THA”) design but we will not be pursuing commercialization until after the knee has been successful approved). The intention of reconstructive joint replacement procedures is to replace diseased or damaged bone with fabricated implants designed to restore patient function. Management of the company has reviewed third party reports trusted by management which identify that approximately 1,059,200 TKA procedures where were conducted in the United States in 2019, compared to 1,011,300 TKA procedures in 2018. This increase in TKA procedures represents a year-over-year increase in surgical volume from 2018 to 2019 of 4.7% for TKA procedures. Generally, the fabricated implants are surgically inserted, and fixation is achieved via cement or osseointegration (“press-fit,” “cementless,” “uncemented”). Monogram is focusing its developments on cementless knee fixation.

Joint reconstruction and musculoskeletal care are widely recognized as highly effective treatments as measured by the rates of long-term survivability. As such, we expect the procedure volumes to continue to grow with strong demographic tailwinds. Industry publications identify the global market for Knee Joint Reconstruction Sales in 2019 was estimated to be $9 billion. Those same publications projected the market for Knee Joint Reconstruction Sales to increase to $10.7 billion by 2023. While insurers and other healthcare providers such as Centers for Medicare & Medicaid Services ("CMS") seem to recognize that these procedures are generally effective at returning patients to productivity, pressures persist in improving quality and reducing cost. We believe these pressures are a potential tailwind for technologies that help surgeons achieve reproducibly, total “episode of care” positive outcomes (reducing the length of stay, reducing revision surgeries, supporting better patient outcomes, etc.). Notably, growth estimates do not factor in the adverse impacts of the COVID-19 pandemic and are likely overstated.

The push for reproducible positive outcomes has been positive for the adoption of computer assisted surgical robotics. Despite this robot adoption is still early. We believe that robotic adoption and the penetration of computer assistive tools remains in the earlier stages of adoption. For instance, in public information available from its Q4 2019 earnings call, Stryker Corporation indicated that it had performed 24,000 Total Knee procedures in the quarter. At the Evercore HEALTHCONx Healthcare Conference on November 28, 2018, Stryker executives indicated that there were approximately 600 robots installed globally but 5,000 hospitals in the US alone that are a target for a least one robot. According to research sources trusted by management, the robotic procedure growth rate may be as high as 29.2% compounded annually over the next 7 years.

It should be noted that the emergence of 3D printing technologies allow manufacturers to print porous structures directly into implants. As identified in the above industry studies, it is our view that the growth and demand for press-fit uncemented implants are increasing and that the penetration of press-fit implants for knee replacements remains low. Further, we believe that the combination of robotics and 3D printing appears to be highly synergistic because of the benefits of precision bone preparation for press-fit implants. Moreover, we believe that advances in 3D printing will continue to improve the mechanical properties and viability of 3D printed implants in a range of applications.

In conclusion, it is our view that computer-assisted robotic procedures will continue to increase market penetration and improve. Advances in image processing, navigation, robotics, and advanced manufacturing are favorable developments.

We believe we are on track to be the first company to market with an active milling navigated robot arm with 3D printed patient-optimized implants. According to Millenium Research Group, as of 2018, Stryker had 86.7% Large-joint Replacement Robotic System Revenue Market Share, OMNIlife Science (acquired by Corin) had 6.8% market share, Smith & Nephew had 4.0%, and Think Surgical had 2.5%. These companies combined represented 100% of the market for large-joint replacement robotic systems. None of those robotic systems feature a multi-joint robot arm capable of active milling (i.e. non-user initiated cuts) that uses a CT-based planning approach to prepare bone for 3D printed patient-optimized implants. It is the observation of our advisors and management that there have been no new market entrants with these capabilities as of the date of this Annual Report, and therefore believe we are in a good position to be the first company to market in this respect.

Relaxed Ongoing Reporting Requirements

If we become a public reporting company in the future, we will be required to publicly report on an ongoing basis as an “emerging growth company” (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies”, including but not limited to:

If we become a public reporting company in the future, we expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We would remain an “emerging growth company” for up to five years, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.

If we do not become a public reporting company under the Exchange Act for any reason, we will be required to publicly report on an ongoing basis under the reporting rules set forth in Regulation A for Tier 2 issuers. The ongoing reporting requirements under Regulation A are more relaxed than for “emerging growth companies” under the Exchange Act. The differences include, but are not limited to, being required to file only annual and semiannual reports, rather than annual and quarterly reports. Annual reports are due within 120 calendar days after the end of the issuer’s fiscal year, and semiannual reports are due within 90 calendar days after the end of the first six months of the issuer’s fiscal year.

In either case, we will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies”, and our shareholders could receive less information than they might expect to receive from more mature public companies. 

Benjamin Sexson, CFA – CEO, President, and Director

Benjamin Sexson is the Chief Executive Officer, President, and a Director of Monogram Orthopedics, and has served in such capacities since he joined the company in April 2018. and has Prior to joining Monogram, Mr. Sexson served as the Director of Business Development at Pro-Dex, Inc., one of the largest OEM manufacturer of Orthopedic Robotic End-Effectors in the world from October 2015 to April 2018. In his tenure at Pro-Dex, Mr. Sexson was responsible for helping support the development, management and launch of the company’s first ever custom proprietary product solution and successfully negotiating the highest margin distribution agreements with a major strategic partner. In addition, Mr. Sexson helped secure and negotiate two additional major development agreements and has helped expand the company’s addressable markets from powered surgical tools in CMF to Thoracic, Trauma, Spine and Extremities as well as other product applications. Mr. Sexson is a named inventor on multiple patent applications at Pro-Dex. Prior to joining Pro-Dex, Mr. Sexson started Brides & Hairpins, a successful B2B retail brand that currently supplies Nordstrom, Bloomingdales, Urban Outfitters. Prior to that, Mr. Sexson worked in various finance positions and is a CFA Charterholder. Mr. Sexson graduated with honors from Caltech with a Bachelor’s Degree in Mechanical Engineering in 2006.

Dr. Douglas Unis – Founder and Director

Dr. Douglas Unis is a board certified orthopedic surgeon specializing in adult reconstructive surgery and is the founder and Chief Medical Officer of Monogram Orthopedics, Inc. Dr. Unis founded Monogram Orthopedics in 2015, and has served as a Director of the company since its inception. Dr. Unis has served as an Associate Professor at the Icahn School of Medicine since November 2015 and has been a practicing surgeon since 2004. He began serving as an Assistant Professor at Icahn School of Medicine at Mount Sinai in March 2014, until becoming an Associate Professor in November 2015. Dr. Unis has consulted with many leading orthopedic companies including Zimmer Biomet and Think Surgical. Prior to founding Monogram Orthopaedics, Dr. Unis was a consultant with Think Surgical, working with them for over 4 years to help with the development of their robotic total hip and knee arthroplasty system. Dr. Unis is widely recognized as a leader and innovator in the NYC area having performed the regions’ first muscle sparing anterior total hip replacement in 2005. Dr. Unis earned his BA from Duke University and Doctor of Medicine from Case Western Reserve University and later completing his residency at Northwestern University and a fellowship from Rush University in Adult Reconstruction.

Rick Van Kirk – Director

Mr. Richard L. Van Kirk is a Director of Monogram, and has served in this capacity since our inception. He is the Chief Executive Officer of Pro-Dex, Inc. (“Pro-Dex”), the largest OEM manufacturer of Orthopedic Robotic End-Effectors on the market. Mr. Van Kirk also serves on Pro-Dex’s Board of Directors. Mr. Van Kirk was appointed to the Board of Directors of Pro-Dex concurrent with his appointment as its CEO in January 2015. He joined Pro-Dex in January 2006 and was named Pro-Dex’s Vice President of Manufacturing in December 2006. In April 2013 he was appointed as the Chief Operating Officer of Pro-Dex. Mr. Van Kirk’s career includes over 13 years of management experience in manufacturing. Mr. Van Kirk previously served as Manufacturing Manager and Manager of Product Development at Comarco Wireless Technologies, ChargeSource Division, which provides power and charging functionality for popular electronic devices and wireless accessories. Prior to Comarco, Mr. Van Kirk was General Manager at Dynacast, a leader in precision die casting. Mr. Van Kirk earned a BA in Business Administration at California State University, Fullerton and an MBA from Claremont Graduate School. 

Noel Goddard – Director

Ms. Noel Goddard is a seed investor with the Accelerate NY Seed Fund, where she has served as a principal from November 2017 and helped build a portfolio of 24 companies across deep technology and life science sectors. She is a serial entrepreneur, having founded/led two life science startup companies and most recently, a deep tech company.  Since April 2020 she has served as the CEO at Qunnect, which builds hardware for scalable quantum networking. From July 2015 to August 2017. Ms. Goddard was the CTO of Symbiotic Health which focused on oral delivery of cellular and biologic therapeutics to the lower GI tract.  In January 2013, Ms. Goddard  founded a food safety diagnostics company, Goddard Labs, in Calverton, NY, and worked with Sapling Learning, a STEM educational software startup acquired by Macmillan Learning. Ms. Goddard obtained her PhD from Rockefeller University, performed postdoctoral research at Harvard Medical School as a fellow in the Society of Fellows, and served as an Assistant Professor of Physics at Hunter College, CUNY, before joining the NY entrepreneurial community.

Kamran Shamaei, PhD – VP of Engineering

Kamran Shamaei received a Ph.D. from Yale University and MSc from ETH Zurich and did his postdoctoral research at Stanford University, focusing on Medical Robotics. He has extensive experience developing FDA cleared surgical robots - Dr. Shamaei has worked on robots in early-stage development and actively in use. Before joining Monogram, Dr. Shamaei supported the development of Monarch robots at Auris Health Inc. Before joining Auris, Dr. Shamaei worked with Think Surgical Inc. on the TSolution One Robot, one of the earliest FDA-approved active milling orthopedic robots. Dr. Shamaei was also a Principal Engineer at Motional, leading the planning team in Pittsburgh. He also served as the CTO and co-founder of a stealth startup developing surgical platforms and served as the Director of Platform at Carbon Robotics.

Kamran Shamaei joined Monogram as VP of Engineering on April 5, 2021.

For the fiscal year ended December 31, 2020, we paid our directors as a group (4) $1,502 in stock-based compensation for their services as directors.

Other than cash and stock-based compensation set out above, no other compensation was provided to the executive officers or directors in their capacities as officers and directors of the company.

On May 7, 2019, the company adopted an incentive plan, which reserved 2,000,000 shares of common stock for issuance under the plan and 600,000 shares allowed for issuance pursuant to Incentive Stock Options. As of April 26, 2021, (i) Benjamin Sexson has been granted options for 535,000 shares under the plan, of which 60,000 have vested; (ii) Doug Unis has been granted options for 555,000 under the plan, of which 67,500 have vested; (iii) Rick Van Kirk has been granted options for 1,000 shares under the plan, of which none have vested; and (iv) Noel Goddard has been granted options for 1,000 shares under the plan, of which none have vested. The Company amended its 2019 Stock Option Plan on August 28, 2020, and the Amended and Restated 2019 Stock Option Plan now reserves 2,600,000 shares of common stock for issuance under the Plan, with up to 780,000 shares allowed for issuance pursuant to Incentive Stock Options.

Item 4. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

The following table sets out, as of the date of this Annual Report, the voting securities of the company that are owned by executive officers and directors, and other persons holding more than 10% of any class of the company’s voting securities, or having the right to acquire those securities. The table assumes that all options and warrants have vested. The company’s voting securities include all shares of the company’s Common Stock.

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

On October 10, 2017, the company entered into an Exclusive Licensing Agreement (the “Licensing Agreement”) with Icahn School of Medicine at Mount Sinai (“Mount Sinai”), an entity which is affiliated with one of our Directors, Doug Unis, who is employed as an associate professor at Mount Sinai. The Licensing Agreement grants Monogram a revenue-bearing, world-wide right and (a) exclusive license, with the right to grant sublicenses (on certain conditions) to certain intellectual property relating to customizable bone implants and surgical planning software and (b) non-exclusive license, with the right to grant sublicenses on certain conditions, to certain technical information for the exploitation of the intellectual property in its field of use and (c) royalty-free, irrevocable license for certain derivative works to be used either commercially outside the field of use or teaching, patient care or non-commercial academic research purposes. Mount Sinai was granted equity in the company pursuant to the Licensing Agreement, along with the right to maintain 12% of the fully-diluted outstanding Common Stock of the company until the company receives an aggregate of $10,000,000 in cash in exchange for its equity securities. As stated above under “Security Ownership of Management and Certain Securities Holders”, Dr. Unis, Mr. Costa, Mr. Somani and the Icahn School of Medicine at Mount Sinai have each agreed, pursuant to a separate agreement to which the company is not a party, to split that 12% as follows: 7.4% to Mount Sinai, 1.6% to Dr. Unis, 1%, to Mr. Somani, and 0.4% to Mr. Costa, with the remaining 0.6% going to the laboratory in which the intellectual property that is the subject of the Licensing Agreement was generated. As of the date of this Annual Report, all shares issuable to Mount Sinai pursuant to the terms of the Licensing Agreement have been issued. Pursuant to the terms the Licensing Agreement (and the Amendment thereto filed as Exhibit 6.14), we must have a first commercial sale our products within seven (7) years of the Effective Date of the agreement, or by October 10, 2024. Failure to meet this deadline would constitute a breach of our agreement, and Mount Sinai would have the right to give us a notice of default, and could ultimately terminate the Licensing Agreement if we fail to cure this default within sixty (60) days.

In addition, as part of the Licensing Agreement, we are obligated to enter into a stock purchase agreement with Mount Sinai for the shares of Common Stock already issued to Mount Sinai. We have not begun negotiating that stock purchase agreement with Mount Sinai, but are required to enter into such an agreement before September 22, 2019. The stock purchase agreement will include “reasonable or customary agreements reasonably required by any future institutional equity investors with respect to the voting of its common stock, and regarding subjecting the common stock held by [Mount Sinai] to rights of first refusal and co-sale…”.

On March 18, 2019, the company entered into an option agreement (the “Option Agreement”) with Mount Sinai pursuant to which the company was granted an option to license additional intellectual property rights under the terms and conditions as set forth in the aforementioned Licensing Agreement. The company exercised this option on March 26^th, 2019 for an exercise fee of $1,000. (See Exhibit 6.9 for further information.) The intellectual property licensed pursuant to this Option Agreement is detailed under “Description of Business – Intellectual Property”. Since this Option Agreement is governed by the terms of the Licensing Agreement, any termination of the Licensing Agreement would automatically terminate this Option Agreement.

Payments under the agreement include: annual license maintenance fees, milestone payments (upon completion of certain events, such as FDA Clearance of Monogram’s custom implants), running royalties (subject to certain adjustments) and sublicense fees.

On December 20, 2018, the company entered into a development and supply agreement with Pro-Dex, Inc., whereby Pro-Dex, Inc. and the company agreed, subject to certain conditions, to negotiate and endeavor to enter into a future agreements through which Pro-Dex, Inc. would develop and supply end-effectors, gearing, and saws, and other surgical products to Monogram. Richard L. Van Kirk is the Chief Executive Officer of Pro-Dex, Inc. and is a Director of Monogram. The conditions to enter into the future development and supply agreements are (i) the raise of at least $5,000,000 in equity capital through the issuance of Common Stock or Preferred Stock by Monogram on or before October 19, 2019, and (ii) the entry into a separate modification agreement regarding the terms of the convertible note issued by Monogram to Pro-Dex, Inc. Monogram and Pro-Dex, Inc. have entered into that modification agreement, dated December 20, 2018, as detailed further below. Richard L. Van Kirk is the Chief Executive Officer of Pro-Dex, Inc. and is a Director of Monogram.

On May 8, 2017, the company issued a convertible promissory note to Ronald Lennox, former CEO and President of Monogram, in the principal amount of $56,000. On April 23, 2020, this note converted into shares of the company’s Series A Preferred Stock as a result of the company’s receipt of gross proceeds of $5,000,000 or more from the Series A Offering, and is no longer outstanding.

On June 23, 2017, the company issued a convertible promissory note to Doug Unis, a Director of Monogram, in the principal amount of $50,000. The note consisted of two proposed tranches, one for $28,000 and a second tranche for $22,000, the release of which was subject to the achievement of certain milestones. The second $22,000 tranche was never contributed under this note. The note bears interest at 4% per year with balance due and payable on June 23, 2019. On January 19, 2018, the company issued a convertible promissory note to American IRA, LLC FBO Julia Jordan IRA, of which Doug Unis is an assign, in the principal amount of $28,000. The note bears interest at 4% per year with balance due and payable on January 19, 2020. Julia Jordan is Doug Unis’s wife. On May 30, 2018, the company issued a convertible promissory note to Doug Unis, a Director of Monogram, in the principal amount of $15,000. The note bears interest at 4% per year with balance due and payable on May 30, 2020. On April 23, 2020, all three of these notes converted into shares of the company’s Series A Preferred Stock as a result of the company’s receipt of gross proceeds of $5,000,000 or more from the Series A Offering, and are no longer outstanding.

On April 19, 2017, the company issued a convertible promissory note to Pro-Dex, Inc., in the principal amount of $800,000. Richard L. Van Kirk is the Chief Executive Officer of Pro-Dex, Inc. and is a Director of Monogram. The company and Pro-Dex, Inc. subsequently amended the terms of the note via an agreement dated December 20, 2018. The note currently bears interest at 6% per year with balance due and payable on October 19, 2019. Pursuant to the agreement as amended between Pro-Dex, Inc. and the company dated December 20, 2018, the company also granted Pro-Dex, Inc. a right of first refusal to purchase an amount equal to 10% of any capital stock offered for sale by the company, subject to certain limitations and exclusions. This right shall continue until a closing of a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933 in which gross proceeds raised by Monogram equal or exceeding $30,000,000. The company also granted Pro-Dex, Inc. the right to appoint one (1) director to the Board of Monogram so long as the note is outstanding. That director is Rick Van Kirk, who currently serves as a director of our company. As of December 31, 2020, this note was paid in full.

On December 20, 2018, the company issued warrants to Pro-Dex, Inc. to purchase up to 5% of the outstanding Common Stock and Preferred Stock of the company as of the date of the exercise, calculated on a post-exercise basis. The warrants have an exercise price of $1,250,000, and may be exercised at any time prior to (i) December 20, 2025, (ii) the closing of an initial public offering of the company’s securities, or (iii) a liquidation event by the company. Richard L. Van Kirk is the Chief Executive Officer of Pro-Dex, Inc. and is a Director of Monogram.

On February 11, 2019, the company issued a convertible promissory note to Benjamin Sexson, Director and CEO of Monogram, in the principal amount of $48,000. The note bears interest at 4% per year with balance due and payable on February 11, 2020. On April 23, 2020, this note automatically converted into shares of the company’s Series A Preferred Stock as a result of the company’s receipt of gross proceeds of $5,000,000 or more from the Series A Offering. As a result, it is no longer outstanding as of the date of this Annual Report.

Members of:

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Management of
Monogram Orthopaedics, Inc.

Austin, Texas

Opinion

We have audited the accompanying financial statements of Monogram Orthopaedics, Inc. (a Delaware corporation), which comprise the balance sheets as of December 31, 2020 and 2019 and the related statements of operations, stockholder' equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Monogram Orthopaedics, Inc. as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Monogram Orthopaedics, Inc. and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Monogram Orthopaedics, Inc.’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with generally accepted auditing standards, we:

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

Spokane, Washington

April 28, 2021 

Accompanying notes are an integral part of these financial statements

Accompanying notes are an integral part of these financial statements

Accompanying notes are an integral part of these financial statements

Accompanying notes are an integral part of these financial statements

MONOGRAM ORTHOPAEDICS INC.

NOTES TO FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

1. Description of Business and Summary of Accounting Principles

Description of the Organization

Monogram Orthopaedics Inc. (“Monogram,” “we,” “our,” or the “Company”), incorporated in the state of Delaware on April 21, 2016, is developing a product solution architecture for enabling mass personalization of orthopedic implants by linking 3D printing and robotics via automated digital image analysis algorithms. 

The company has a working navigated robot prototype that can optically track a simulated surgical target and execute optimized auto-generated cut paths for high precision insertion of patient specific implants in synthetic bone specimens. These implants and cut-paths are generated with proprietary Monogram software algorithms.

The financial statements are presented in United States dollars and have been prepared in accordance with generally accepted accounting principles in the United States of America.  The Company’s fiscal year end is December 31. The Company operated from its headquarters in Brooklyn, New York until January 2020 when it moved to Austin, Texas.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. A valuation allowance has been established to eliminate the Company’s deferred tax assets as it is more likely than not that none of the deferred tax assets will be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in income tax expense. The Company has determined that it had no significant uncertain tax positions requiring recognition or disclosure.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.    

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Adoption of the new standard resulted in no changes for revenue recognition related as the Company has not yet generated revenue.

Earnings (Loss) Per Share

Earnings (loss) per share is computed by dividing net income or loss by the weighted-average number of shares outstanding. To the extent that stock options, warrants and convertible preferred stock are anti-dilutive, they are excluded from the calculation of diluted earnings (loss) per share. See Note 9 for details of potentially dilutive securities.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company did not have any cash equivalents during fiscal 2020 and 2019. The Company uses two financial institutions for its cash balances, and occasionally maintains cash balances that exceed federally insured limits.

Equipment

Equipment expenditures are recorded at cost. Costs which extend the useful lives or increase the productivity of the assets are capitalized, while normal repairs and maintenance that do not extend the useful life or increase the productivity of the asset are expensed as incurred. Equipment, including the Company’s robot, are depreciated on the straight-line method over the estimated useful lives of the assets. Equipment will be depreciated over a five-year useful life. Any construction in progress is stated at cost and depreciation will commence once the project is constructed and placed in service.

Intangibles

Monogram licensed on a perpetual non-exclusive basis the intellectual property rights to certain FDA approved implants and instruments granting Monogram certain rights and privileges to use and develop products for use in the United States, the United Kingdom and certain territories within the European Union using the licensed intellectual property including applicable product specifications and documentation. The full cost of $150,000 for the license was capitalized and will be amortized over 60 months.

Asset Impairment

Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company recorded no asset impairment in 2020 or 2019.

General and Administrative Expenses

General and administrative expenses include salaries, travel and office expenses of administrative employees and contractors; software license fees; and other overhead expenses.

Stock-Based Compensation

The Company applies the fair value method of ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards No. l23R "Accounting for Stock Based Compensation," in accounting for its stock-based compensation. This accounting standard states that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, if any. As the Company does not have sufficient, reliable, and readily determinable values relating to its common stock, the Company has used (i) the stock value pursuant to an independent valuation dated February 27, 2019 to record stock-based compensation at a price of $0.09 per share and (ii) its most recent sale of stock of $4.00 per share in December 2020 for valuing stock-based compensation at December 31, 2020. The Company has elected to recognize option costs on a straight-line basis over the requisite service periods.

Research and Development Costs

Research and development (“R&D”) costs are expensed as incurred and amounted to $1,599,960 and $194,287 for the years ended December 31, 2020 and 2019, respectively. The company currently has several R&D initiatives underway including mechanical testing of a patient specific hip, micromotion studies of a patient specific press-fit knee implant, and performance testing of a robot mounted navigation system.

Advertising Costs

Advertising and marketing costs are expensed as incurred and amounted to $1,182,007 and $205,207 for the years ended December 31, 2020 and 2019, respectively.

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the warrant liability, valuations of stock-based compensation and the income tax valuation allowance. On a continual basis, management reviews its estimates, utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses.  The new guidance provides better representation about expected credit losses on financial instruments. This Update requires the use of a methodology that reflects expected losses and requires consideration of a broader range of reasonable and supportive information to inform credit loss estimates.  This ASU is effective for reporting periods beginning after December 15, 2022, with early adoption permitted.  The company is studying the impact of adopting the ASU in 2023, and what effect it could have. The Company believes the accounting change would not have a material effect on the financial statements.

In March 2017 the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. This amendment simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This update is effective for fiscal years beginning after December 15, 2021. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvement to Nonemployee Share-based Payment Accounting, which simplifies the accounting for share-based payments. The company elected early adoption of this ASU, using the modified retrospective approach, so that all stock compensation to employees and nonemployees is treated under the same guidance as in ASC 718. No outstanding stock option grants were required to be revalued upon the adoption of this ASU.

Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.

2. Going Concern Matters and Realization of Assets

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. However, the Company has sustained recurring losses from its continuing operations and as of December 31, 2020, had working capital of $3,449,074 and a stockholders’ accumulation of $4,989,433. In addition, the Company may become unable to meet its future obligations as they become due and sustain its operations. The Company believes that its existing cash resources may become insufficient to fund its continuing operating losses, capital expenditures, lease and debt payments and working capital requirements in the future. 

The Company may not be able to raise sufficient additional debt, equity or other cash on acceptable terms, if at all. Failure to generate sufficient revenues, achieve certain other business plan objectives or raise additional funds could have a material adverse effect on the Company’s results of operations, cash flows and financial position, including its ability to continue as a going concern, and may require it to significantly reduce, reorganize, discontinue or shut down its operations.

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in its existence. Management’s plans include:

Management has determined, based on its recent history and its liquidity issues that it is not probable that management’s plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. Accordingly, the management of the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements.

There can be no assurance that the Company will be able to achieve or maintain cash-flow-positive operating results. If the Company is unable to generate adequate funds from operations or raise sufficient additional funds, the Company may not be able to repay its existing debt, continue to develop its product, respond to competitive pressures or fund its operations. As a result, the Company may be required to significantly reduce, reorganize, discontinue or shut down its operations. The financial statements do not include any adjustments that might result from this uncertainty.

3. Equipment

Equipment, net consists of the following as of December 31, 2020 and 2019

For the years ended December 31, 2020 and 2019, depreciation expense amounted to $95,694 and $31,763, respectively.

Intangible Assets consists of the following as of December 31, 2020 and 2019

Monogram licensed on a perpetual non-exclusive basis the intellectual property rights to certain FDA approved implants and instruments granting Monogram certain rights and privileges to use and develop products for use in the United States, the United Kingdom and certain territories within the European Union using the licensed intellectual property including applicable product specifications and documentation. The full cost of the license was capitalized and will be amortized over 60 months.

4. Debt

The following table summarizes components debt as of December 31, 2020 and 2019: 

In 2020, all previous outstanding convertible notes of the company issued between 2017 and 2020 either converted into Series A Preferred Stock of the Company or were repaid. The Company currently has no outstanding convertible notes.

Interest expense amounted to $54,250 and $124,470 for the years ended December 31, 2020 and 2019, respectively. Accrued interest payable amounted to $0 and $78,072 at December 31, 2020 and 2019, respectively. Accrued interest payable to related parties amounted to $0 and $124,964 at December 31, 2020 and 2019, respectively.

5. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures of financial instruments on a recurring basis.

Fair Value Hierarchy

The Fair Value Measurements Topic of FASB’s ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability.

Determination of Fair Value

Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the Company bases its fair value on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon management’s own estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future value.

Valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value where it is practicable to do so for financial instruments not recorded at fair value are as follows:

Cash and cash equivalents, accounts receivable, and accounts payable

The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. In general, carrying amounts approximate fair value because of the short maturity of these instruments.

Long-lived Assets

Long-lived assets are measured at fair value on a non-recurring basis and are classified in Level 3 of the fair value hierarchy. The fair value is estimated utilizing unobservable inputs, including appraisals on real estate as well as evaluations of the marketability and potential relocation of other assets in similar condition and similar market areas.

Debt

 At December 31, 2020 and 2019, the Company’s convertible debt was carried at its face value plus accrued interest. Based on the financial condition of the Company, it is impracticable for the Company to estimate the fair value of its short and long-term debt.

Stock-Based Compensation

The Company records stock-based compensation based upon (i) the stock value pursuant to an independent valuation prepared in compliance with Internal Revenue Code Section 409A and Accounting Standards Codification 718 dated February 27, 2019 that assigned a fair market value to the Company's common stock at a price of $0.09 per share or (ii) its most recent sale of stock of $4.00 per share in December 2019.

Warrant Liability Measured and Recognized at Fair Value on a Recurring Basis

The following table presents the amounts of warrant liability measured at fair value on a recurring basis as of December 31, 2020 and 2019

The fair value of the warrant liability is generally measured using pricing models with no observable inputs.  These measurements are classified as Level 3 within the fair value of hierarchy.  

The Company has no instruments with significant off-balance sheet risk.

6. Income Taxes

At December 31, 2020, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $7,500,000 expiring in the years of 2020 through 2035. Utilization of the net operating losses may be subject to annual limitations provided by Section 382 of the Internal Revenue Code and similar State provisions.

The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among numerous provisions, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. As a result of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.

Due to the net losses incurred, the Company recorded no income tax expense for the years ended December 31, 2020 and 2019.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019 were as follows:

The valuation allowance increased to approximately $1,575,000 at December 31, 2020, from $590,000 at December 31, 2019.

The following is a reconciliation of the tax provisions for the years ended December 31, 2020 and 2019 with the statutory Federal income tax rates:

The Company did not have any material unrecognized tax benefits as of December 31, 2020 and 2019. The Company does not expect the unrecognized tax benefits to significantly increase or decrease within the next twelve months.  The Company recorded no interest and penalties relating to unrecognized tax benefits as of and during the years ended December 31, 2020 and 2019. The Company is subject to U.S. federal income tax, as well as taxes by various state jurisdictions. The Company is currently open to audit under the statute of limitations by the federal and state jurisdictions for the years ending December 31, 2017 through 2020.

7. Commitments and Contingencies

Litigation

The Company accrues for loss contingencies associated with outstanding litigation, claims and assessments for which management has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. Costs for professional services associated with litigation claims are expensed as incurred. As of December 31, 2020, the Company has not accrued or incurred any amounts for litigation matters.

Leases

On February 24, 2020, the company executed an industrial net lease at 3913 Todd Lane, Suite 307 in Austin, Texas, which serves as its new headquarters. The Company leases its headquarters on a lease agreement that expires on March 31, 2024. In the first year of the lease of unit 307, the monthly base rent for the premises was $5,408.00 and increases to $5,909.47 in the fourth year. For the years ended December 31, 2020 and 2019, rent expense amounted to $80,762 and $28,465, respectively. On January 25, 2021, the Company executed an amendment its industrial net lease at 3913 Todd Lane Austin, Texas to expand the premises to include Suite 107. The additional premises are approximately 1,952 square feet and the lease term remains from March 1, 2020 to March 31, 2024. In the first year of the lease of unit 107, the monthly base rent for the new premises is $2,680, and it increases to $2,843 in the third year. There are no surrender or term extension provisions. Current portion of lease liability was calculated using 12 months at current rent price. The long-term portion of lease liability carries the rent payments through the life of the lease.

The following is a table of the Future Minimum Base Lease Payments with the Total Operating Lease Liabilities:

As of December 31, 2020 the current Operating Lease Liabilities were $57,544 and the non-current Operating Lease Liabilities were $147,944. The Company estimated its average borrowing rate of 5% when calculating the imputed interest.

Non-Dilutive Warrant

On December 20, 2018, the Company issued a non-dilutive warrant that expires on December 20, 2025. The warrant is convertible into 5% of the outstanding equity of the Company at a purchase price of $1,250,000, and is valued at $2,523,797 and $229,244 at December 31, 2020 and 2019 respectively. As the company issues shares of common or preferred stock, this warrant liability is subject to increasing in value.

8. Stockholders’ Deficit

The Company is authorized to issue 22,000,000 shares of its common stock, par value $0.001 per share (the "Common Stock”), and 14,000,000 shares of preferred stock, par value $0.001 per share.  The Company has designated 5,500,000 shares of preferred stock as Series A Preferred Stock and 8,000,000 shares as Series B Preferred Stock.  The remainder of the Preferred Stock is undesignated.

As of December 31, 2020, the outstanding shares of the company included:

The board of directors authorized a reverse split of the Common Stock on a 1-for-25 basis, whereby the Company issued to each of its stockholders one share of Common Stock for every 25 shares of Common Stock held by such stockholder. The reverse split was effective on May 29, 2019. The financial statements as of and for the year ended December 31, 2018 have been presented to give effect to the reverse split.

In May 2018, the company purchased all of the 38,000 shares issued to one of the founding shareholders for a payment of $970, which were immediately retired and recorded as unissued stock. As a result of this transaction, the common stock account decreased by $38 and capital in excess of par value decreased by $912.

In the year ended December 31, 2020, the Company recorded $2,163,823 in stock-based compensation expense in conjunction with the issuance of Common Stock and options to purchase Common Stock. A total of 519,831 common shares were issued in 2020.

The Series A Preferred Stock is convertible into Common Stock either at the discretion of the investor or automatically upon the occurrence of certain events, like effectiveness of registration of the Common Stock in an initial public offering. The rights and preferences associated with the Common Stock and Series A Preferred Stock are as follows:

Common Stock

Voting Rights

Each holder of the company’s Common Stock is entitled to one vote for each share on all matters submitted to a vote of the shareholders, including the election of directors. In addition, holders of our Common Stock are entitled to vote as a separate class for the election of two (2) directors of the company’s Board of Directors. Holders of our Preferred Stock may not vote on the election of these directors.

Dividend Rights

Holders of Common Stock are entitled to receive dividends, as may be declared from time to time by the Board of Directors out of legally available funds as detailed in the company’s Restated Articles. The company has never declared or paid cash dividends on any of its capital stock.

Liquidation Rights

In the event of a voluntary or involuntary liquidation, dissolution, or winding up of the company, the holders of the Common Stock are entitled to share ratably in the net assets legally available for distribution to shareholders after the payment of all debts and other liabilities of the company. Holders of the Series A Preferred Stock are entitled to a liquidation preference that is senior to holders of the Common Stock, and therefore would receive dividends and liquidation assets prior to the holders of the Common Stock.

Preferred Stock

The terms of the Series A Preferred Stock and Series B Preferred Stock are substantially the same. As such, the following description of the Series B Preferred Stock is applicable to the Series A Preferred Stock, unless otherwise noted below.

Series B Preferred Stock

Voting Rights

Each holder of the company’s Series B Preferred Stock is entitled to one vote for each share on all matters submitted to a vote of the shareholders, including the election of directors, subject to the following restrictions:

The holders of our Common Stock are entitled to elect two (2) directors to the company’s Board of Directors as a standalone class. The Series B Preferred Stockholders may not exercise any voting rights in the election of these directors.

Holders of our Series B Preferred Stock specifically have the right to vote with the holders of the Common Stock to elect:

Each holder of Series B Preferred Stock will be entitled to one vote for each share of Common Stock into which such share of Preferred Stock could be converted. Fractional votes will not be permitted and if the conversion results in a fractional share, it will be disregarded.

Additionally, the holders of the Series B Preferred Stock are entitled to certain protective provisions that require the company to obtain the written consent or affirmative vote of a majority of the outstanding shares of Preferred Stock prior to effecting certain corporate actions, comprised of the following:

Dividend Rights

Holders of Series B Preferred Stock will be entitled to receive dividends as may be declared from time to time by the Board of Directors out of legally available funds and on a pari passu basis with holders of the Common Stock. The company has never declared or paid cash dividends on any of its capital stock and currently does not anticipate paying any cash dividends in the foreseeable future.

Conversion Rights

Shares of Series B Preferred Stock will be convertible, at the option of the holder, at any time, into fully paid and nonassessable shares of the company’s Common Stock at the then-applicable conversion rate. Initially, the conversion rate will be one share of Common Stock per share of Series B Preferred Stock. The conversion rate is subject to adjustment in the event of stock splits, reverse stock splits or the issuance of a dividend or other distribution payable in additional shares of Common Stock.

Additionally, each share of Series B Preferred Stock will automatically convert into Common Stock:

In either of these events, the shares will convert in the same manner as a voluntary conversion.

Right to Receive Liquidation Distributions

In the event of a liquidation, dissolution or winding up of the company, whether voluntary or involuntary, or certain other events (each a “Deemed Liquidation Event”) such as the sale or merger of the company, all holders of Series B Preferred Stock will be entitled to a liquidation preference that is senior to holders of the Common Stock. Holders of Series B Preferred Stock will receive a liquidation preference equal to the greater of (a) an amount for each share equal to the Original Issue Price for such share, adjusted for any stock dividends, combinations, splits, recapitalizations and the like (the “liquidation preference”) plus any declared but unpaid dividends with respect to such shares or (b) such amount per share as would have been payable had all shares of Series B Preferred Stock been converted into Common Stock immediately prior to such liquidation, dissolution or winding up or Deemed Liquidation Event. Initially, the liquidation preferences for the shares of Series B Preferred Stock will be $6.27 per share (the “Original Issue Price”).

If, upon such liquidation, dissolution, or winding up or Deemed Liquidation Event, the assets (or the consideration received in a transaction) that are distributable to the holders of Preferred Stock are insufficient to permit the payment to such holders of the full amount of their respective liquidation preference, then all of such funds will be distributed ratably among the holders of the Preferred Stock in proportion to the full amounts to which they would otherwise be entitled to receive.

After the payment of the full liquidation preference of the Series B Preferred Stock, the remaining assets of the company legally available for distribution (or the consideration received in a transaction), if any, will be distributed ratably to the holders of the Common Stock in proportion to the number of shares of Common Stock held by each such holder.

(Note: The “Original Issue Price” for the Series A Preferred Stock is $4.00. All other terms are the same.)
 

Drag Along Right

The investors’ rights agreement that investors will execute in connection with the offering contains a “drag-along provision” related to the certain events, such as the sale, merger or dissolution of the company (a “Liquidating Event”). Investors who purchase Series B Preferred Stock agree that, if the board of directors, the majority of the holders of the company’s Common Stock, and the majority of the holders of the company’s Series B Preferred Stock vote in favor of such a Liquidating Event, then such holders of Series B Preferred Stock will vote in favor of the transaction if such vote is solicited, refrain from exercising dissenters’ rights with respect to Liquidating Event, and deliver any documentation or take other actions reasonably requested by the company or the other holders in connection with the Liquidating Event.

Information Rights

The company also agrees in the investors’ rights agreement to grant certain information rights to investors that invest $50,000 or more in in the Company’s offering of Series B Preferred Stock (“Major Purchasers”). The information rights provided to Major Purchasers include: (1) annual unaudited financial statements for each fiscal year of the company, including an unaudited balance sheet as of the end of such fiscal year, an unaudited income statement, and an unaudited statement of cash flows, all prepared in accordance with generally accepted accounting principles and practices; and (2) quarterly unaudited financial statements for each fiscal quarter of the company (except the last quarter of the company’s fiscal year), including an unaudited balance sheet as of the end of such fiscal quarter, an unaudited income statement, and an unaudited statement of cash flows, all prepared in accordance with generally accepted accounting principles and practices, subject to changes resulting from normal year-end audit adjustments. If the company has audited records of any of the foregoing, it will provide those in lieu of the unaudited versions.  

Additional Rights and Participation Rights

The investors’ rights agreement that investors will execute in connection with the offering grants investors and their transferees certain rights in connection with the company’s next equity offering. If in its next equity offering after the date that an investor executes the investors’ rights agreement (the “Next Financing”) the company issues securities that (a) have rights, preferences or privileges that are more favorable than the terms of the Series B Preferred Stock or (b) provide all such future investors in the Next Financing contractual terms such as registration rights, the company agrees to provide substantially equivalent rights to the investor with respect to the Series B Preferred Stock (with appropriate adjustment for economic terms or other contractual rights), including the amount of the Series B preferred stock liquidating distributions, through the investor’s proxy, if applicable, subject to the investor’s execution of any documents, including, if applicable, investor rights, co-sale, voting, and other agreements, executed by the investors purchasing securities in the Next Financing (the “Next Financing Documents”), provided that certain rights may be reserved for investors with a minimum amount of investment in the Next Financing. Upon the execution and delivery of the Next Financing Documents, the investors’ rights agreement (excluding any then-existing and outstanding obligations) will be automatically amended and restated by and into the Next Financing Documents and will be terminated and of no further force or effect. As a result, the rights of investors who participate in any Next Financing will instead be governed by the Next Financing Documents.

In the investors’ rights agreement, the company also grants investors in this offering participation rights. Investors will have the right of first refusal to purchase the investor’s Pro Rata Share of any New Securities (each as defined below) that the company may issue in the Next Financing. The investor will have no right to purchase any New Securities if the investor cannot demonstrate to the company’s reasonable satisfaction that the investor is at the time of the proposed issuance of New Securities eligible to purchase such New Securities under applicable securities laws. An investor’s “Pro Rata Share” means the ratio of (i) the number of shares of the company’s Common Stock issued or issuable upon conversion of the Series B Preferred Stock owned by the investor, to (ii) that number of shares of the company’s capital stock equal to the sum of (A) all shares of the company’s capital stock (on an as-converted basis) issued and outstanding, assuming exercise or conversion of all options, warrants and other convertible securities and promissory notes, and (B) all shares of the company’s capital stock reserved and available for future grant under any equity incentive or similar plan.

“New Securities” means any shares of the company’s capital stock to be issued in the Next Financing, including Common Stock or Preferred Stock, whether now authorized or not, and rights, options or warrants to purchase Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible or exchangeable into Common Stock or Preferred Stock “New Securities” does not include: (i) shares of Common Stock issued or issuable upon conversion of any outstanding shares of Preferred Stock; (ii) Common Stock or Series B Preferred Stock issued upon conversion of any outstanding convertible notes; a(iii) shares of Common Stock or Preferred Stock issuable upon exercise of any options, warrants, or rights to purchase any securities of the company outstanding as of the date the Offering Statement is qualified by the Commission and any securities issuable upon the conversion thereof; (iv) shares of Common Stock or Preferred Stock issued in connection with any stock split or stock dividend or recapitalization; (v) shares of Common Stock (or options, warrants or rights therefor) granted or issued after the date the Offering Statement is qualified by the Commission to employees, officers, directors, contractors, consultants or advisers to, the company or any subsidiary of the company pursuant to incentive agreements, stock purchase or stock option plans, stock bonuses or awards, warrants, contracts or other arrangements that are approved by the board of directors; (vi) shares of the company’s Series B Preferred Stock issued in this offering; (vii) any other shares of Common Stock or Preferred Stock (and/or options or warrants therefor) issued or issuable primarily for other than equity financing purposes and approved by the board of directors; (vii) shares of Common Stock issued or issuable by the company to the public pursuant to a registration statement filed under the Securities Act; and (ix) any other shares of the company’s capital stock, the issuance of which is specifically excluded by approval of the board of directors.

The company will send investors, or investors’ proxies, if applicable, a notice describing the type of New Securities and the price and the general terms upon which it proposes to issue the New Securities. An investor will have fourteen (14) days from the date of notice, to agree to purchase a quantity of New Securities, up to their Pro Rata Share. If an investor fails to exercise in full the right of first refusal within the 14-day period, then the company will have one hundred twenty (120) days after that to sell the New Securities with respect to which the investor’s right of first refusal was not exercised. If the company has not issued and sold the minimum amount of New Securities to be sold in the Next Financing within the 120-day period, then the company will not issue or sell any New Securities without again first offering those New Securities to investors in accordance with the terms of the investors’ rights agreement.

Benjamin Sexson, CEO, is entitled to pre-emptive rights permitting him preserve his vested equity position in the company in the event of any additional issuances of company common stock (or securities convertible into common stock), at a per-share price equal to the then current fair market value, as reasonably determined by the Board. Mr. Sexson does not intend to exercise this pre-emptive right.

(Note: Investors in the Company’s Series A Offering entered into an investors’ rights agreement with near identical terms to the investors’ rights agreement in the Company’s Series B Offeringd Stock..)

Warrants

On December 20, 2018 the Company issued a 7-year non-dilutive cashless warrant to purchase (i) shares of common stock equal to five percent (5%), calculated on a post-exercise basis, of the fully diluted capitalization of the Company, as of the date or dates of exercise, plus (ii) shares of preferred stock of each class or series of preferred stock of the Company equal to five percent (5%), calculated on a post-exercise basis, of the total issued and outstanding number of preferred shares of the Company, as of the date or dates of exercise. At December 31, 2020, based upon the Black-Scholes valuation model, with assumptions including: (1) a term of 4.973 years; (2) a volatility rate of 19.8% (3) a discount rate of 1.76% and (4) zero dividends, the warrant liability was valued at $2,523,797.

Stock Options

The Company adopted a stock option plan and granted stock options to qualified individuals. Based upon a February 27, 2019 valuation performed by an independent and qualified financial consultant, all stock option grants were valued at between $0.09 and $4.00 per share, which represents the estimated market value of a share of common stock at a date that was close to the date of the grants. Each grant vest in approximately four years, and expires in ten years from the date of the grant. The weighted average remaining life of the grants is 9.15 years at December 31, 2020.

On Friday, August 28th, 2020, the Company revised the 2019 Stock Option and Grant Plan.  The maximum number of Shares reserved and available for issuance under the Plan is 2,600,000 Shares with no more than 780,000 Shares to be issued pursuant to Incentive Stock Options.

Stock-based compensation expense from the option grants amounted to $84,499 for the year ended December 31, 2020. The remaining unrecognized option expense that will be recognized as the option grants vest is $554,456. These values were calculated at December 31, 2020 based upon the Black-Scholes valuation model, with assumptions including: (1) various terms; (2) a volatility rate of 19.8%; (3) a discount rate of 1.76% and (4) zero dividends.

The following table summarizes the option grant activity for the years ended December 31, 2020 and 2019.

9. Loss Per Common Share

Loss per common share data was computed as follows:

For the year ended December 31, 2020, the Company excluded 4,897,559 shares of Common Stock issuable upon conversion of Series A Preferred Stock and 1,129,474 shares of Common Stock issuable upon the exercise of outstanding options and warrants to purchase Common Stock from the calculation of net loss per share because the effect would be anti-dilutive. For the year ended December 31, 2019, the Company excluded 702,021 shares of common stock issuable upon conversion of Series A Preferred Stock and 704,268 shares of Common Stock issuable upon the exercise of outstanding options and warrants to purchase Common Stock from the calculation of net loss per share because the effect would be anti-dilutive.

10. Related Party Transactions

The Company has transactions with officers and directors or entities related to the officers and directors that are classified as related party transactions. Such transactions and balances as of and for the years ended December 31, 2020 and 2019 are as follows:

The Company owes a board member $0 in notes payable and $71,000 in notes payable at December 31, 2020 and 2019. The same board member is also owed $0 and $5,969 in accrued interest payable, and $0 and $4,000 in accounts payable at December 31, 2020 and 2019, respectively. This board member also received a stock option grant to purchase 180,000 shares of common stock at a price of $0.61 per share. The grant vests over a four-year period ending on May 27, 2023 and expires on May 27, 2029. The grant was valued at $12,193; $3,054 in expense was recorded in the year ended December 31, 2020 and $7,319 is the remaining unrecognized option expense at December 31, 2020.

The Company owes its Chief Executive Officer $0 and $4,518 in accounts payable and $214,356 and $88,125 in salary payable at December 31, 2020 and 2019, respectively. On May 27, 2019, the Chief Executive Officer received a stock option grant to purchase 160,000 shares of common stock at a price of $0.61 per share. The grant vests over a four-year period ending on May 27, 2023 and expires on May 27, 2029. The grant was valued at $10,838 and $2,715 in expense was recorded in the year ended December 31, 2020 and $6,506 is the remaining unrecognized option expense at December 31, 2020.

On August 1st, 2020, the Chief Executive Officer received a stock option grant to purchase 375,000 shares of common stock at a price of $4.00 per share. 25% of the shares vest and become exercisable on the first anniversary of the vesting commencement date and thereafter, the remaining 75% of the shares vest and become exercisable in six equal 6-month installments over the three-year period following the first anniversary of the vesting commencement date. The grant was valued at $281,739 and $29,312 in expense was recorded in the year ended December 31, 2020 and $252,427 is the remaining unrecognized option expense at December 31, 2020.

On August 1st, 2020, a Board Member received a stock option grant to purchase 375,000 shares of common stock at a price of $4.00 per share. 25% of the shares vest and become exercisable on the first anniversary of the vesting commencement date and thereafter, the remaining 75% of the shares vest and become exercisable in six equal 6-month installments over the three-year period following the first anniversary of the vesting commencement date. The grant was valued at $281,739 and $29,312 in expense was recorded in the year ended December 31, 2020 and $252,427 is the remaining unrecognized option expense at December 31, 2020.

As of December 31, 2020 and 2019, the Company owes a related-party lender notes payable of $0 and $800,000 and accrued interest payable of $0 and $117,295, respectively. This lender also holds the anti-dilutive warrant for which the Company has recorded a warrant liability of $2,523,797. See Notes 5 and 8.

Stock-based compensation to officers for the year ended December 31, 2020 amounted to $2,163,823. 519,831 shares of Common Stock issued to the Company's Chief Executive Officer were recorded as $520 in stock-based compensation. The Common Stock issuances were valued at a price of $0.09 per shared based upon an independent valuation prepared in compliance with Internal Revenue Code Section 409A and Accounting Standards Codification 718.

11. Compensation of Directors and Executive Officers

For the fiscal year ended December 31, 2020, we compensated our highest-paid directors and executive officers as follows:

12. Subsequent Events

On April 5, 2021, the Company hired a Vice President of Engineering. In addition to his base salary, he received a signing bonus of $110,000 and stock options (“Options”) to purchase 150,000 shares of Common Stock at an exercise price of $6.25 per share. 25% of the Option shall vest and become exercisable on his first anniversary if he continues to have a service relationship with the Company at such time. Thereafter, the remaining 75% of the Option shall vest and become exercisable in twelve equal 6-month installments over the six-year period following the first anniversary date, provided he continues to have a service relationship with the Company on each vesting date.

On January 25, 2021, the Company executed an amendment its industrial net lease at 3913 Todd Lane Austin, Texas to expand the premises to include Suite 107. The additional premises are approximately 1,952 square feet and the lease term remains from March 1, 2020 to March 31, 2024. In the first year of the lease, the monthly base rent for the new premises is $2,680, and it increases to $2,843 in the third year.

On January 15, 2021, the Company received a notice of qualification to issue up to 4,784,689 shares of Series B Preferred Stock, plus up to 478,468 additional shares of Series B Preferred Stock eligible to be issued as Bonus Shares to investors at a price of $6.27 per share. As of April 25, 2021 the company has raised gross proceeds of approximately $5,338,234.

On April 5, 2021, the Company terminated its existing consulting contract with Dr. Unis and entered into a new consulting contract dated April 5, 2021. As an advisor of the company, Dr. Unis shall be compensated at a rate of $95 per hour and under no circumstances shall the consultant perform in excess of 80 hours per month without the express written consent of the Company representative.

On April 16, 2021, the Company licensed certain proprietary software and technology assets for a one-time fee in the amount of $625,000 from a surgical robotics company Surgical Platform for Orthopedic Applications. On April 22, 2021, the Company licensed certain proprietary software and technology assets for a one-time fee in the amount of $350,000 from the same surgical robotics company.

The Company evaluated subsequent events through April 28, 2021, the date these original financial statements were available to be issued. There were no other material subsequent events that required recognition or additional disclosure in these financial statements.

Exhibit 6.1

MONOGRAM ORTHOPAEDICS INC.

SCIENTIFIC ADVISOR CONSULTING AGREEMENT

This Scientific Advisor Consulting Agreement (“Agreement”) is entered into as of 4/5/2021  by and between Monogram Orthopaedics Inc., a Delaware corporation (the “Company”), and Douglas Unis, MD (“Consultant”). The Company desires to retain Consultant as an independent contractor to perform consulting services for the Company, and Consultant is willing to perform such services, on the terms described below. In consideration of the mutual promises contained herein, the parties agree as follows:

1.       Services and Compensation; Fair Market Value. Commencing on the date hereof, Consultant agrees to perform for the Company the services described in Exhibit A (the “Services”), and the Company agrees to pay Consultant the compensation described in Exhibit A for Consultant’s performance of the Services. The parties acknowledge and agree that: (i) the aggregate compensation payable to Consultant hereunder does not exceed the fair market value of the Services; and (ii) nothing contained herein or in any other agreement or understanding between the parties shall require Consultant to refer, recommend or utilize any of the Company’s goods or services. Notwithstanding any unanticipated effect of any provision of this Agreement, neither party shall knowingly or intentionally conduct itself (or himself or herself as applicable) hereunder in a manner that violates the prohibition against fraud and abuse in connection with Medicare and Medicaid programs (42 USC Sec. 1320a – 7b) or any similar federal, state or local laws or regulations.

2.       Confidentiality.

A.            Definition. “Confidential Information” means any non-public information that relates to the actual or anticipated business or research and development of the Company, technical data, trade secrets or know-how, including, but not limited to, research, product plans or other information regarding Company's products or services and markets therefor, customer lists and customers (including, but not limited to, customers of the Company on whom Consultant called or with whom Consultant became acquainted during the term of this Agreement), software, developments, inventions, processes, formulas, technology, designs, drawing, engineering, hardware configuration information, marketing, finances or other business information. Confidential Information does not include information that (i) is known to Consultant at the time of disclosure to Consultant by the Company as evidenced by written records of Consultant, (ii) has become publicly known and made generally available through no wrongful act of Consultant or (iii) has been rightfully received by Consultant from a third party who is authorized to make such disclosure.

B.             Nonuse and Nondisclosure. Consultant will not, during or subsequent to the term of this Agreement, (i) use the Confidential Information for any purpose whatsoever other than the performance of the Services on behalf of the Company or (ii) disclose the Confidential Information to any third party. Consultant agrees that all Confidential Information will remain the sole property of the Company. Consultant also agrees to take all reasonable precautions to prevent any unauthorized disclosure of such Confidential Information.

C.            Former Client Confidential Information. Consultant agrees that Consultant will not, during the term of this Agreement, improperly use or disclose any proprietary information or trade secrets of any former or current employer of Consultant or other person or entity with which Consultant has an agreement or duty to keep in confidence information acquired by Consultant, if any. Consultant also agrees that Consultant will not bring onto the Company’s premises any unpublished document or proprietary information belonging to any such employer, person or entity unless consented to in writing by such employer, person or entity.

D.           Third Party Confidential Information. Consultant recognizes that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Consultant agrees that, during the term of this Agreement and thereafter, Consultant owes the Company and such third parties a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out the Services for the Company consistent with the Company’s agreement with such third party.

E.             Return of Materials. Upon the termination of this Agreement, or upon Company’s earlier request, Consultant will deliver to the Company all of the Company’s property, including but not limited to all electronically stored information and passwords to access such property, or Confidential Information that Consultant may have in Consultant’s possession or control.

A.           Assignment. Consultant agrees that all copyrightable material, notes, records,drawings, designs, inventions, improvements, developments, discoveries and trade secrets conceived, discovered, developed or reduced to practice by Consultant, solely or in collaboration with others, during the term of this Agreement that relate in any manner to the business of the Company that Consultant may be directed to undertake, investigate or experiment with or that Consultant may become associated with in work, investigation or experimentation in the Company’s line of business in performing the Services under this Agreement (collectively, “Inventions”), are the sole property of the Company. Consultant also agrees to assign (or cause to be assigned) and hereby assigns fully to the Company all Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating to all Inventions.

B.            Further Assurances. Consultant agrees to assist Company, or its designee, at the Company’s expense, in every proper way to secure the Company’s rights in Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating to all Inventions in any and all countries, including the disclosure to the Company of all pertinent information and data with respect to all Inventions, the execution of all applications, specifications, oaths, assignments and all other instruments that the Company may deem necessary in order to apply for and obtain such rights and in order to assign and convey to the Company, its successors, assigns and nominees the sole and exclusive right, title and interest in and to all Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating to all Inventions. Consultant also agrees that Consultant’s obligation to execute or cause to be executed any such instrument or papers shall continue after the termination of this Agreement.

C.            Pre-Existing Materials. Subject to Section 3.A, Consultant agrees that if, in the course of performing the Services, Consultant incorporates into any Invention developed under this Agreement any pre-existing invention, improvement, development, concept, discovery or other proprietary information owned by Consultant or in which Consultant has an interest, (i) Consultant will inform Company, in writing before incorporating such invention, improvement, development, concept, discovery or other proprietary information into any Invention, and (ii) the Company is hereby granted a nonexclusive, royalty-free, perpetual, irrevocable, worldwide license to make, have made, modify, use and sell such item as part of or in connection with such Invention. Consultant will not incorporate any invention, improvement, development, concept, discovery or other proprietary information owned by any third party into any Invention without Company’s prior written permission.

D.            Attorney-in-Fact. Consultant agrees that, if the Company is unable because of Consultant’s unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure Consultant’s signature for the purpose of applying for or pursuing any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned to the Company in Section 3.A, then Consultant hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Consultant’s agent and attorney-in-fact, to act for and on Consultant’s behalf to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations with the same legal force and effect as if executed by Consultant.

A.            Conflicts. Consultant certifies that Consultant has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement or that would preclude Consultant from complying with the provisions of this Agreement. Consultant will not enter into any such conflicting agreement during the term of this Agreement. Consultant’s violation of this Section 4.A will be considered a material breach under Section 6.B.

B.            Substantially Similar Designs. In view of Consultant’s access to the Company’s trade secrets and proprietary know-how, Consultant agrees that Consultant will not, without Company’s prior written approval, design identical or substantially similar designs as those developed under this Agreement for any third party during the term of this Agreement and for a period of 12 months after the termination of this Agreement. Consultant acknowledges that the obligations in this Section 4 are ancillary to Consultant’s nondisclosure obligations under Section 2.

5.            Reports. Consultant also agrees that Consultant may be required, as requested by the Company, from time to time during the term of this Agreement or any extension thereof, to keep the Company advised as to Consultant’s progress in performing the Services under this Agreement. Consultant further agrees that Consultant will, as requested by the Company, prepare written reports with respect to such progress. The Company and Consultant agree that the time required to prepare such written reports will be considered time devoted to the performance of the Services.

6.           Term and Termination.

A.         Term. The term of this Agreement will begin on the date of this Agreement and will continue until the earlier of (i) final completion of the Services or (ii) termination as provided in Section 6.B. Consultant represents and warrants that Consultant does not presently perform or intend to perform, during the term of the Agreement, consulting or other services for, or engage in or intend to engage in an employment relationship with, companies who businesses or proposed businesses in any way involve products or services which would be competitive with the Company’s products or services, or those products or services proposed or in development by the Company during the term of the Agreement.

B.          Termination. Either party may terminate this Agreement upon giving the other party 30 days’ prior written notice of such termination pursuant to Section 11.E of this Agreement; provided, however, that subject to the immediately following sentence, the Company shall not terminate this Agreement prior to the first anniversary of the date of this Agreement. The Company may terminate this Agreement immediately and without prior notice if Consultant refuses to or is unable to perform the Services or is in breach of any material provision of this Agreement.

C.          Survival. Upon such termination, all rights and duties of the Company and Consultant toward each other shall cease except:

(1)     The Company will pay, within 30 days after the effective date of termination, all amounts owing to Consultant for Services completed and accepted by the Company prior to the termination date and related expenses, if any, submitted in accordance with the Company’s policies and in accordance with the provisions of Section 1 of this Agreement; and

(2)     Section 2 (Confidentiality), Section 3 (Ownership), Section 4 (Conflicting Obligations), Section 7 (Independent Contractor; Benefits), Section 8 (Indemnification), Section 9 (Nonsolicitation) and Section 10 (Arbitration and Equitable Relief) will survive termination of this Agreement.

7.       Independent Contractor; Benefits.

A.       Independent Contractor. It is the express intention of the Company and Consultant that Consultant perform the Services as an independent contractor to the Company. Nothing in this Agreement shall in any way be construed to constitute Consultant as an agent, employee or representative of the Company. Without limiting the generality of the foregoing, Consultant is not authorized to bind the Company to any liability or obligation or to represent that Consultant has any such authority. Consultant agrees to furnish (or reimburse the Company for) all tools and materials necessary to accomplish this Agreement and shall incur all expenses associated with performance, except as expressly provided in Exhibit A. Consultant acknowledges and agrees that Consultant is obligated to report as income all compensation received by Consultant pursuant to this Agreement. Consultant agrees to and acknowledges the obligation to pay all self-employment and other taxes on such income.

B.       Benefits. The Company and Consultant agree that Consultant will receive no Company-sponsored benefits from the Company. If Consultant is reclassified by a state or federal agency or court as Company’s employee, Consultant will become a reclassified employee and will receive no benefits from the Company, except those mandated by state or federal law, even if by the terms of the Company’s benefit plans or programs of the Company in effect at the time of such reclassification, Consultant would otherwise be eligible for such benefits.

8.            Indemnification. Consultant agrees to indemnify and hold harmless the Company and its directors, officers and employees from and against all taxes, losses, damages, liabilities, costs and expenses, including attorneys’ fees and other legal expenses, arising directly or indirectly from or in connection with (i) any negligent, reckless or intentionally wrongful act of Consultant or Consultant’s assistants, employees or agents, (ii) a determination by a court or agency that Consultant is not an independent contractor, (iii) any breach by Consultant or Consultant’s assistants, employees or agents of any of the covenants contained in this Agreement, (iv) any failure of Consultant to perform the Services in accordance with all applicable laws, rules and regulations, or (v) any violation or claimed violation of a third party’s rights resulting in whole or in part from the Company’s use of the work product of Consultant under this Agreement.

9.            Nonsolicitation. From the date of this Agreement until 12 months after the termination of this Agreement (the “Restricted Period”), Consultant will not, without the Company’s prior written consent, directly or indirectly, solicit or encourage any employee or contractor of the Company or its affiliates to terminate employment with, or cease providing services to, the Company or its affiliates. During the Restricted Period, Consultant will not, whether for Consultant’s own account or for the account of any other person, firm, corporation or other business organization, intentionally interfere with any person who is or during the period of Consultant’s engagement by the Company was a partner, supplier, customer or client of the Company or its affiliates.

A.       Arbitration. Consultant agrees that any and all controversies, claims or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company, in its capacity as such or otherwise) arising out of, relating to or resulting from Consultant’s performance of the Services under this Agreement or the termination of this Agreement, including any breach of this Agreement, shall be subject to binding arbitration under the Arbitration Rules set forth in California Code of Civil Procedure Section 1280 through 1294.2, including Section 1283.05 (the “Rules”) and pursuant to California law. CONSULTANT AGREES TO ARBITRATE, AND THEREBY AGREES TO WAIVE ANY RIGHT TO A TRIAL BY JURY WITH RESPECT TO, ALL DISPUTES ARISING FROM OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO: ANY STATUTORY CLAIMS UNDER STATE OR FEDERAL LAW, CLAIMS UNDER TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, THE CALIFORNIA LABOR CODE, CLAIMS OF HARASSMENT, DISCRIMINATION OR WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. Consultant understands that this Agreement to arbitrate also applies to any disputes that the Company may have with Consultant.

B.       Procedure. Consultant agrees that any arbitration will be administered by the American Arbitration Association (“AAA”), and that a neutral arbitrator will be selected in a manner consistent with its National Rules for the Resolution of Employment Disputes. Consultant agrees that the arbitrator will have the power to decide any motions brought by any party to the arbitration, including discovery motions, motions for summary judgment and/or adjudication and motions to dismiss and demurrers, prior to any arbitration hearing. Consultant agrees that the arbitrator will issue a written decision on the merits. Consultant also agrees that the arbitrator will have the power to award any remedies, including attorneys’ fees and costs, available under applicable law. Consultant understands that the Company will pay for any administrative or hearing fees charged by the arbitrator or AAA, except that Consultant shall pay the first $200.00 of any filing fees associated with any arbitration Consultant initiates. Consultant agrees that the arbitrator will administer and conduct any arbitration in a manner consistent with the Rules and that, to the extent that the AAA’s National Rules for the Resolution of Employment Disputes conflict with the Rules, the Rules will take precedence.

C.       Remedy. Except as provided by the Rules, arbitration will be the sole, exclusive and final remedy for any dispute between the Company and Consultant. Accordingly, except as provided for by the Rules, neither the Company nor Consultant will be permitted to pursue court action regarding claims that are subject to arbitration. Notwithstanding the foregoing, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and the arbitrator shall not order or require the Company to adopt a policy not otherwise required by law which the Company has not adopted.

D.       Availability of Injunctive Relief. In addition to the right under the Rules to petition the court for provisional relief, Consultant agrees that any party may also petition the court for injunctive relief where either party alleges or claims a violation of Sections 2 (Confidentiality), 3 (Ownership) or 4 (Conflicting Obligations) of this Agreement or any other agreement regarding trade secrets, confidential information, nonsolicitation or Labor Code §2870. In the event either the Company or Consultant seeks injunctive relief, the prevailing party will be entitled to recover reasonable costs and attorneys’ fees.

E.       Administrative Relief. Consultant understands that this Agreement does not prohibit Consultant from pursuing an administrative claim with a local, state or federal administrative body such as the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission or the workers’ compensation board. This Agreement does, however, preclude Consultant from pursuing court action regarding any such claim.

F.       Voluntary Nature of Agreement. Consultant acknowledges and agrees that Consultant is executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. Consultant further acknowledges and agrees that Consultant has carefully read this Agreement and has asked any questions needed to understand the terms, consequences and binding effect of this Agreement and fully understand it, including that Consultant is waiving its right to a jury trial. Finally, Consultant agrees that Consultant has been provided an opportunity to seek the advice of an attorney of its choice before signing this Agreement.

11.       Miscellaneous.

A.       Governing Law. This Agreement shall be governed by the laws of California without regard to California's conflicts of law rules.

B.        Assignability. Except as otherwise provided in this Agreement, Consultant may not sell, assign or delegate any rights or obligations under this Agreement.

C.        Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior written and oral agreements between the parties regarding the subject matter of this Agreement.

D.       Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.

E.       Notices. Any notice or other communication required or permitted by this Agreement to be given to a party shall be in writing and shall be deemed given if delivered personally or by commercial messenger or courier service, or mailed by U.S. registered or certified mail (return receipt requested), or sent via facsimile (with receipt of confirmation of complete transmission) to the party at the party's address or facsimile number written below or at such other address or facsimile number as the party may have previously specified by like notice. If by mail, delivery shall be deemed effective 3 business days after mailing in accordance with this Section 11(E).

F.          Attorneys’ Fees. In any court action at law or equity that is brought by one of the parties to this Agreement to enforce or interpret the provisions of this Agreement, the prevailing party will be entitled to reasonable attorneys’ fees, in addition to any other relief to which that party may be entitled.

G.         Severability. If any provision of this Agreement is found to be illegal or unenforceable, the other provisions shall remain effective and enforceable to the greatest extent permitted by law.

(Remainder of page intentionally left blank.)

IN WITNESS WHEREOF, the parties hereto have executed this Consulting Agreement as of the date first written above.

[Signature Page to Consulting Agreement]

EXHIBIT A

Services and Compensation

1. Contact. Consultant’s principal Company contact (unless otherwise directed in writing by the Company’s President and Chief Executive Officer):

Name: Douglas Unis

Title: Associate Professor of Orthopaedics at Icahn School of Medicine at Mt Sinai

2. Services. Notably, all activities must be directly specified by Benjamin Sexson, CEO, (the “Company Representatives”). Absent the express written consent of these individuals, no other Monogram employees shall have the authority to direct or request services to be performed by the Consultant. The Services shall include, but shall not be limited to, the following:

Prior to performance of Services one of the Company Representatives will clearly communicate the desired Services and general expectations of time required for planning purposes. The Consultant agrees that if upon reasonable written request of Services by the Company, the Consultant is unable to offer a minimum of 12 hours of service per year (“Minimum Availability”), it will serve as grounds for reasonable termination of the Agreement.

3.       Compensation.

A. The Company will pay Consultant for the Services an hourly rate of $95.00. The Services and the scope of the Services performed by Consultant must be pre-approved and agreed upon with the Company prior to commencement of such Services Consultant shall submit an invoice for the performed Services not less frequently than monthly. Under no circumstances shall the consultant perform in excess of 80 hours per month without the express written concent of the Company representative.

B. The Company will reimburse Consultant for all reasonable expenses incurred by Consultant in performing the Services pursuant to this Agreement, if Consultant receives written consent from an authorized agent of the Company prior to incurring such expenses and submits receipts for such expenses to the Company in accordance with Company policy. Physician shall be compensated for actual reasonable travel time associated with providing Project Services at an hourly rate of $50 per hour, which shall be capped for any 24-hour period at 8 hours.

D. Consultant shall submit to the Company a written invoice for expenses, that Consultant incurred in the course of performing Services pre-approved and agreed upon with the Company prior to commencement of such Services, and such statement shall be subject to the approval of the contact person listed above or other designated agent of the Company.

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[Signature Page to Exhibit A of Consulting Agreement]