ENDRA Life Sciences Inc. 10-Q

Item 1. Financial Statements ENDRA Life Sciences Inc. Condensed Consolidated Balance Sheets September 30, December 31, 2021 2020 (Unaudited) Assets Current Assets Cash $ 11,793,189 $ 7,227,316 Prepaid expenses 1,177,201 390,800 Inventory 1,499,743 589,620 Total Current Assets 14,470,133 8,207,736 Non-Current Assets Fixed assets, net 162,265 212,242 Right of use assets 675,822 339,012 Other assets 5,986 5,986 Total Assets $ 15,314,206 $ 8,764,976 Liabilities and Stockholders’ Equity Current Liabilities Accounts payable and accrued liabilities $ 1,449,130 $ 910,183 Lease liabilities, current portion 127,696 76,480 Total Current Liabilities 1,576,826 986,663 Long Term Debt Loans 28,484 337,084 Lease liabilities 552,830 271,908 Total Long Term Debt 581,314 608,992 Total Liabilities 2,158,140 1,595,655 Stockholders’ Equity Series A Convertible Preferred Stock, $0.0001 par value; 10,000 shares authorized; 141.397 and 190.288 shares issued and outstanding, respectively 1 1 Series B Convertible Preferred Stock, $0.0001 par value; 1,000 shares authorized; no shares issued and outstanding - - Common stock, $0.0001 par value; 80,000,000 shares authorized; 42,165,726 and 34,049,704 shares issued and outstanding, respectively 4,215 3,404 Additional paid in capital 78,695,367 64,493,611 Stock payable 42,665 10,794 Accumulated deficit ( 65,586,182 ) ( 57,338,489 ) Total Stockholders’ Equity 13,156,066 7,169,321 Total Liabilities and Stockholders’ Equity $ 15,314,206 $ 8,764,976 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents ENDRA Life Sciences Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 Operating Expenses Research and development $ 1,173,319 $ 1,769,339 $ 4,059,730 $ 4,774,534 Sales and marketing 275,565 139,751 693,263 389,469 General and administrative 1,201,851 1,346,360 3,673,771 4,083,572 Total operating expenses 2,650,735 3,255,450 8,426,764 9,247,575 Operating loss ( 2,650,735 ) ( 3,255,450 ) ( 8,426,764 ) ( 9,247,575 ) Other Expenses Amortization of debt discount - - - (232,426 ) Gain on extinguishment of debt - - 308,600 - Other income (expense) ( 7,507 ) ( 2,621 ) ( 8,458 ) 5,261 Total other expenses ( 7,507 ) ( 2,621 ) 300,142 ( 227,165 ) Loss from operations before income taxes ( 2,658,242 ) ( 3,258,071 ) ( 8,126,622 ) ( 9,474,740 ) Provision for income taxes - - - - Net Loss $ ( 2,658,242 ) $ ( 3,258,071 ) $ ( 8,126,622 ) $ ( 9,474,740 ) Deemed dividend - (395,551 ) (121,071 ) (395,551 ) Net loss attributable to common stockholders $ ( 2,658,242 ) $ ( 3,653,622 ) $ ( 8,247,693 ) $ ( 9,870,291 ) Net loss per share – basic and diluted $ ( 0.06 ) $ ( 0.15 ) $ ( 0.20 ) $ ( 0.41 ) Weighted average common shares – basic and diluted 41,912,535 23,889,591 40,471,906 23,808,012 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Three Months Ended September 30, 2020 Series A Convertible Series B Convertible Additional Total Preferred Stock Preferred Stock Common stock Paid in Stock Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Payable Deficit Equity Balance as of June 30, 2020 896,225 $ 1 - $ - 16,437,491 $ 1,644 $ 52,227,904 181,437 ( 51,434,106 ) 976,880 Series A Convertible Preferred Stock converted to common stock ( 705,937 ) - - - 811,423 81 4,709 ( 4,790 ) - - Common stock issued for cash - - - - 539,365 54 530,362 - - 530,416 Common Stock issued for warrant exercise - - - - 7,040,133 702 4,948,897 ( 85,626 ) - 4,863,973 Common stock issued for services - - - - 30,000 3 27,297 ( 27,300 ) - - Common stock issued for RSUs - - - - 157,298 16 110,093 - - 110,109 Cost of funding - - - - - - ( 243,028 ) - - ( 243,028 ) Fair value of vested stock options - - - - - - 282,419 - - 282,419 Deemed dividend - - - - - - 395,551 - ( 395,551 ) - Stock Payable for: - - Preference Dividend - - - - - - ( 2,531 ) 2,531 - - - Consultants - - - - - - - 30,000 - 30,000 - RSUs to board and management - - - - - - - 42,284 - 42,284 Net loss - - - - - - - - ( 3,258,071 ) ( 3,258,071 ) Balance as of September 30, 2020 190,288 $ 1 - $ - 25,015,710 $ 2,500 $ 58,281,673 $ 138,536 $ ( 55,087,728 ) $ 3,334,982 Three Months Ended September 30, 2021 Series A Convertible Series B Convertible Additional Total Preferred Stock Preferred Stock Common stock Paid in Stock Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Payable Deficit Equity Balance as of June 30, 2021 141,397 $ 1 - $ - 41,857,352 $ 4,185 $ 77,838,745 74,907 ( 62,927,940 ) 14,989,898 Common stock issued for cash, net of funding costs - - - - 283,953 28 496,585 - - 496,613 Common stock issued for option exercise - - - - 1,606 - - - - - Fair value of vested stock options - - - - - - 327,797 - - 327,797 Stock payable for preference dividend - - - - - - ( 4,218 ) 4,218 - - Common stock issued for RSU - - - - 22,815 2 36,458 ( 36,460 ) - - Net loss - - - - - - - - ( 2,658,242 ) ( 2,658,242 ) Balance as of September 30, 2021 141,397 $ 1 - $ - 42,165,726 $ 4,215 $ 78,695,367 $ 42,665 $ ( 65,586,182 ) $ 13,156,066 5 Table of Contents Nine Months Ended September 30, 2020 Series A Convertible Series B Convertible Additional Total Preferred Stock Preferred Stock Common stock Paid in Stock Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Payable Deficit Equity Balance as of December 31, 2019 6,338,490 $ 1 351,711 $ - 8,421,401 $ 842 $ 49,933,736 43,528 ( 45,217,437 ) 4,760,670 Series A Convertible Preferred Stock converted to common stock (6,148,202 ) - - - 7,173,226 717 75,207 ( 75,924 ) - - Series B Convertible Preferred Stock converted to common stock - - ( 351,711 ) - 360,279 36 1,634 ( 1,670 ) - - Common stock issued for cash - - - - 1,421,858 142 1,321,748 - - 1,321,890 Common stock issued for note conversions - - - - 331,441 33 493,814 - - 493,847 Common stock issued for warrant exercise - - - - 7,098,108 709 4,999,328 ( 85,626 ) - 4,914,411 Common stock issued for services - - - - 52,099 5 67,295 - - 67,300 Common stock issued for RSU - - - - 157,298 16 110,093 - - 110,109 Cost of funding - - - - - - ( 270,328 ) - - ( 270,328 ) Fair value of vested stock options - - - - - - 1,196,445 - - 1,196,445 Fair value adjustment related to warrants repricing - - - - - - 395,551 - ( 395,551 ) - Stock payable for: - Preference Dividend - - - - - - ( 42,850 ) 42,850 - - - Consultants - - - - - - - 30,000 - 30,000 - RSU to board and management - - - - - - - 185,378 - 185,378 Net loss - - - - - - - - ( 9,474,740 ) ( 9,474,740 ) Balance as of September 30, 2020 190,288 $ 1 - $ - 25,015,710 $ 2,500 $ 58,281,673 $ 138,536 $ ( 55,087,728 ) $ 3,334,982 Nine Months Ended September 30, 2021 Series A Convertible Series B Convertible Additional Total Preferred Stock Preferred Stock Common stock Paid in Stock Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Payable Deficit Equity Balance as of December 31, 2020 196,794 $ 1 - $ - 34,049,704 $ 3,404 $ 64,493,611 10,795 ( 57,338,489 ) 7,169,322 Series A Convertible Preferred Stock converted to common stock ( 55,397 ) - - - 67,889 7 ( 7 ) - - - Common stock issued for cash, net of funding costs - - - - 4,198,170 420 10,294,479 - - 10,294,899 Common stock issued for warrant exercise - - - - 3,770,786 377 2,785,250 - - 2,785,627 Common stock issued for option exercise - - - - 23,835 2 ( 2 ) - - - Fair value of vested stock options - - - - - - 922,375 - - 922,375 Stock payable for preference dividend - - - - - - ( 31,870 ) 31,870 - - Common stock issued for services - - - - 32,527 3 74,997 - - 74,000 Common stock issued for RSU - - - - 22,815 2 36,458 - - 36,460 Deemed dividend - - - - - - 121,071 - ( 121,071 ) - Net loss - - - - - - - - ( 8,126,622 ) ( 8,126,622 ) Balance as of September 30, 2021 141,397 $ 1 - $ - 42,165,726 $ 4,215 $ 78,695,367 $ 42,665 $ ( 65,586,182 ) $ 13,156,066 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents ENDRA Life Sciences Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended Nine Months Ended September 30, September 30, 2021 2020 Cash Flows from Operating Activities Net loss $ ( 8,126,622 ) $ ( 9,474,740 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 94,977 45,114 Stock compensation expense including common stock issued for RSUs 1,032,835 1,559,232 Amortization of debt discount - 232,426 Amortization of right of use assets 75,768 48,859 Gain on extinguishment of debt (308,600 ) - Stock payable for investor relations - 30,000 Changes in operating assets and liabilities: Increase in prepaid expenses ( 786,401 ) ( 444,805 ) Increase in inventory ( 910,123 ) ( 209,766 ) Decrease in other asset - 29,250 Increase(decrease) in accounts payable and accrued liabilities 528,797 ( 444,167 ) Decrease in lease liability ( 70,289 ) ( 44,892 ) Net cash used in operating activities ( 8,469,653 ) ( 8,673,489 ) Cash Flows from Investing Activities Purchases of fixed assets (45,000 ) (10,483 ) Net cash used in investing activities ( 45,000 ) ( 10,483 ) Cash Flows from Financing Activities Proceeds from warrant exercise 2,785,627 4,644,084 Proceeds from loans - 337,084 Proceeds from issuance of common stock 10,294,899 1,321,890 Net cash provided by financing activities 13,080,526 6,303,058 Net increase (decrease) in cash 4,565,875 ( 2,380,914 ) Cash, beginning of period 7,227,316 6,174,207 Cash, end of period $ 11,793,189 $ 3,793,293 Supplemental disclosures of cash items Interest paid $ 40,887 $ 1,920 Income tax paid $ - Supplemental disclosures of non-cash items Conversion of convertible notes and accrued interest $ - $ 493,814 Exchange of balance in convertible notes and accrued interest for Series A preferred stock $ - $ - Deemed dividend $ 121,071 $ 395,551 Conversion of Series A Convertible Preferred Stock $ ( 7 ) $ ( 717 ) Conversion of Series B Convertible Preferred Stock $ - $ ( 36 ) Stock dividend payable $ ( 31,870 ) $ ( 47,641 ) Stock issued for RSU $ 36,462 $ - Right of use asset $ 675,822 $ 356,060 Lease liability $ 680,526 $ 364,113 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents ENDRA Life Sciences Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020 (Unaudited) Note 1 – Nature of the Business ENDRA Life Sciences Inc. (“ENDRA” or the “Company”) has developed and is continuing to develop technology for increasing the capabilities of clinical diagnostic ultrasound to broaden patient access to the safe diagnosis and treatment of a number of significant medical conditions in circumstances where expensive X-ray computed tomography (“CT”) and magnetic resonance imaging (“MRI”) technology is unavailable or impractical. ENDRA was incorporated on July 18, 2007 as a Delaware corporation. Note 2 – Summary of Significant Accounting Policies Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Management makes estimates that affect certain accounts including deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the period in which such adjustments are determined. The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to issue “stay-at-home” or similar orders, and enact restrictions on the performance of “non-essential” services, public gatherings and travel. The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2021 and through the date of the filing of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to, estimates related to the accounting for potential liabilities and accrued expenses, the assumptions utilized in valuing stock-based compensation issued for services, the realization of deferred tax assets, and assessments of impairment related to long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods. Despite the Company’s efforts, the ultimate impact of COVID-19 on the Company’s business depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the extent to which COVID-19 will negatively impact its financial results or liquidity. Principles of Consolidation The Company’s consolidated financial statements include all accounts of the Company and its consolidated subsidiary and/or entities as of reporting period ending date(s) and for the reporting period(s) then ended. All inter-company balances and transactions have been eliminated. Basis of Presentation The accompanying unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The balance sheet at December 31, 2020 has been derived from the audited financial statements at that date. For further information, refer to the financial statements and footnotes thereto included in ENDRA Life Sciences Inc. annual financial statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2021. Cash and Cash Equivalents The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of one year or less, when purchased, to be cash. As of September 30, 2021 and December 31, 2020, the Company had no cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible. Inventory The Company’s inventory is stated at the lower of cost or estimated net realizable value, with cost primarily determined on a weighted-average cost basis on the first-in, first-out method. The Company periodically determines whether a reserve should be taken for devaluation or obsolescence of inventory. Capitalization of Fixed Assets The Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed as incurred. Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements. At September 30, 2021 and December 31, 2020 the Company recorded a lease liability of $ 680,526 and $ 348,388 , respectively. At September 30, 2021 and December 31, 2020 the Company recorded a right of use asset of $ 675,822 and $ 339,012 , respectively. Revenue Recognition In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASC Topic 606”). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the updated guidance effective January 1, 2018 using the full retrospective method. The new standard did not have a material impact on its financial position and results of operations, as it did not change the manner or timing of recognizing revenue. Under ASC Topic 606, in order to recognize revenue, the Company is required to identify an approved contract with commitments to perform respective obligations, identify rights of each party in the transaction regarding goods to be transferred, identify the payment terms for the goods transferred, verify that the contract has commercial substance and verify that collection of substantially all consideration is probable. The adoption of ASC Topic 606 did not have an impact on the Company’s operations or cash flows. Research and Development Costs The Company follows FASB Accounting Standards Codification (“ASC”) Subtopic 730-10, “Research and Development”. Research and development costs are charged to the statement of operations as incurred. During the three months ended September 30, 2021 and 2020, the Company incurred $ 1,173,319 and $ 1,769,339 of expenses related to research and development costs, respectively. During the nine months ended September 30, 2021 and 2020, the Company incurred $ 4,059,730 and $ 4,774,534 of expenses related to research and development costs, respectively. Net Earnings (Loss) Per Common Share The Company computes earnings per share under ASC Subtopic 260-10, “Earnings Per Share”. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. There were 7,695,899 and 10,047,010 potentially dilutive shares, which include outstanding common stock options, warrants and shares of convertible preferred stock as of September 30, 2021 and December 31, 2020, respectively. The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows: September 30, 2021 December 31, 2020 Options to purchase common stock 5,096,210 3,569,707 Warrants to purchase common stock 2,437,164 6,251,103 Shares issuable upon conversion of Series A Convertible Preferred Stock 162,525 226,200 Potential equivalent shares excluded 7,695,899 10,047,010 Fair Value Measurements Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. In accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” the Company measures certain financial instruments at fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. Fair value is defined as 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. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring 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 unobservable inputs (Level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of the short maturity of these instruments. The fair value of notes payable and convertible notes approximates their fair values since the current interest rates and terms on these obligations are the same as prevailing market rates. Share-based Compensation The Company’s 2016 Omnibus Incentive Plan (the “Omnibus Plan”) permits the grant of stock options and other share-based awards to its employees, consultants and non-employee members of the board of directors. Each January 1 the pool of shares available for issuance under the Omnibus Plan automatically increases by an amount equal to the lesser of (i) the number of shares necessary such that the aggregate number of shares available under the Omnibus Plan equals 25% of the number of fully-diluted outstanding shares on the increase date (assuming the conversion of all outstanding shares of preferred stock and other outstanding convertible securities and exercise of all outstanding options and warrants to purchase shares) and (ii) if the board of directors takes action to set a lower amount, the amount determined by the board. On January 1, 2021, the pool of shares available for issuance under the Omnibus Plan automatically increased by 1,599,570 shares, from 5,861,658 shares to 7,461,228 . The Company records share-based compensation in accordance with the provisions of the Share-based Compensation Topic of the FASB Codification. The guidance requires the use of option-pricing models that require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model, and the resulting charge is expensed using the straight-line attribution method over the vesting period. Stock compensation expense recognized during the period is based on the value of share-based awards that were expected to vest during the period adjusted for estimated forfeitures. The estimated fair value of grants of stock options and warrants to non-employees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under the stock incentive plan as described above. Going Concern The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has limited commercial experience and had a cumulative net loss from inception to September 30, 2021 of $ 65,586,182 . The Company had working capital of $ 12,893,307 as of September 30, 2021. The Company has not established an ongoing source of revenue sufficient to cover its operating costs and to allow it to continue as a going concern. The accompanying financial statements for the period ended September 30, 2021 have been prepared assuming the Company will continue as a going concern. Although the Company’s cash resources will likely be sufficient to meet its anticipated needs during the next twelve months, the Company will require additional financing to fund its future planned operations, including research and development and commercialization of its products. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes a revenue stream and becomes profitable. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. As described further below under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” the COVID-19 pandemic has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. If the Company is not able to obtain the necessary additional financing on a timely basis, the Company will be required to delay, reduce the scope of, or eliminate one or more of the Company’s research and development activities or commercialization efforts or perhaps even cease the operation of its business. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Recent Accounting Pronouncements The Company considered recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC, did not or in management’s opinion will not have a material impact on the Company’s present or future consolidated financial statements. Note 3 – Inventory As of September 30, 2021 and December 31, 2020, inventory consisted of raw materials and subassemblies to be used in the assembly of a TAEUS system. As of September 30, 2021, the Company had no orders pending for the sale of a TAEUS system. Note 4 – Fixed Assets As of September 30, 2021 and December 31, 2020, fixed assets consisted of the following: September 30, 2021 December 31, 2020 Property, leasehold and capitalized software $ 718,902 $ 718,902 TAEUS development and testing 124,208 79,207 Accumulated depreciation ( 680,845 ) ( 585,867 ) Fixed assets, net $ 162,265 $ 212,242 Depreciation expense for the nine months ended September 30, 2021 and 2020 was $ 94,977 and $ 45,114 , respectively. 11 Table of Contents Note 5 – Accounts Payable and Accrued Liabilities As of September 30, 2021 and December 31, 2020, current liabilities consisted of the following: September 30, 2021 December 31, 2020 Accounts payable $ 747,762 $ 402,910 Accrued payroll 196,079 48,260 Accrued bonuses 294,554 369,393 Accrued employee benefits 5,750 5,750 Insurance premium financing 204,985 83,870 Total $ 1,449,130 $ 910,183 Note 6 – Bank Loans U.S. SBA Paycheck Protection Program In April 2020, the Company issued a U.S. Small Business Administration (“SBA”) Paycheck Protection Program Note (the “SBA Note”) to First Republic Bank (the “Lender”) for a loan in the principal amount of $ 308,600 (the “SBA Loan”) under the Paycheck Protection Program (“PPP”) promulgated under the Coronavirus Aid, Relief and Economic Security Act of 2020, as modified by the Paycheck Protection Program Flexibility Act of 2020. The Company has applied to the Lender for the SBA Loan to be forgiven and on May 10, 2021 received notice that the SBA Loan had been forgiven in full in accordance with the terms and provisions of the PPP. The Company did not provide any collateral or personal guarantees for the SBA Loan, nor did the Company pay any facility charge to the government or to the Lender. Toronto-Dominion Bank Loan On April 27, 2020, the Company entered into a commitment loan with TD Bank under the Canadian Emergency Business Account, in the principal aggregate amount of CAD 40,000 , which is due and payable upon the expiration of the initial term on December 31, 2022 . This note bears interest on the unpaid balance at the rate of zero percent ( 0 %) per annum during the initial term. Under this note no interest payments are due until January 1, 2023. Under the conditions of the loan, twenty-five percent (25%) of the loan will be forgiven if seventy-five percent (75%) is repaid prior to the initial term date. Note 7 – Capital Stock At September 30, 2021, the authorized capital of the Company consisted of 90,000,000 shares of capital stock, comprised of 80,000,000 shares of common stock with a par value of $ 0.0001 per share, and 10,000,000 shares of preferred stock with a par value of $ 0.0001 per share. The Company has designated 10,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”) and 1,000 shares of its preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”), and the remainder of 9,989,000 shares remain authorized but undesignated. As of September 30, 2021, there were 42,165,726 shares of common stock, 141,397 shares of Series A Preferred Stock, and no shares of Series B Preferred Stock issued and outstanding, and a stock payable balance of $ 42,665 . During the nine months ended September 30, 2021, the Company issued a total of 8,116,023 shares of its common stock, as follows: ● 67,889 shares upon the conversion of 55.397 shares of its Series A Preferred Stock; ● 4,198,170 shares in return for aggregate net proceeds of $ 10,294,904 from sales of common stock; ● 3,567,899 shares upon warrant exercises for an aggregate exercise price of $ 2,785,627 ; ● 202,887 shares upon cashless warrant exercises; ● 23,835 shares upon cashless option exercise; and ● 32,527 shares for services valued at $ 74,000 . ● 22,815 shares for RSUs valued at $ 36,460 . At-the-Market Equity Offering Programs During the nine months ended September 30, 2021, the Company entered into at-the-market equity offering sales agreements with Ascendiant to sell shares of common stock. On February 19, 2021, the Company entered into the At-The-Market Issuance Sales Agreement with Ascendiant (the “February 2021 ATM Agreement”) to sell shares of common stock for aggregate gross proceeds of up to $ 12.6 million, from time to time, through an “at-the-market” equity offering program under which Ascendiant acted as sales agent. On June 21, 2021, the Company entered into the At-The-Market Issuance Sales Agreement with Ascendiant (the “June 2021 ATM Agreement” and, together with the February 2021 ATM Agreement, the “2021 ATM Agreements”) to sell shares of common stock for aggregate gross proceeds of up to $ 20.0 million, from time to time, through an “at-the-market” equity offering program under which Ascendiant acts as sales agent. The February 2021 ATM Agreement terminated upon the Company’s and Ascendiant’s entry into the June 2021 ATM Agreement. Prior to its termination in June 2021, under the February 2021 ATM Agreement the Company issued an aggregate of 3,914,217 shares of common stock in return for net proceeds of $ 9,798,293 , resulting in approximately $ 303,243 of compensation paid to Ascendiant. As of September 30, 2021, under the June 2021 ATM Agreement the Company has issued an aggregate of 283,953 shares of common stock in return for net proceeds of $ 496,613 , resulting in approximately $ 15,461 of compensation paid to Ascendiant. Note 8 – Common Stock Options and Restricted Stock Units (“RSU’s’’) Common Stock Options Stock options are awarded to the Company’s employees, consultants and non-employee members of the board of directors under the 2016 Omnibus Incentive Plan (the “Omnibus Plan”) and are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The aggregate fair value of these stock options granted by the Company during the nine months ended September 30, 2021 was determined to be $ 3,511,662 using the Black-Scholes-Merton option-pricing model based on the following assumptions: (i) volatility rate of 81 % to 99 %, (ii) discount rate of 0 %, (iii) zero expected dividend yield, and (iv) expected life of 8 - 10 years. A summary of option activity under the Company’s Omnibus Plan as of September 30, 2021, and changes during the period then ended, is presented below: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Balance outstanding at December 31, 2020 3,569,707 $ 2.13 7.50 Granted 1,679,000 1.98 7.59 Exercised ( 37,645 ) - - Forfeited - - - Cancelled or expired ( 114,852 ) - - Balance outstanding at September 30, 2021 5,096,210 $ 2.08 7.03 Exercisable at September 30, 2021 2,073,249 $ 2.79 5.90 Restricted Stock Units A restricted stock unit grants a participant the right to receive one share of common stock, following the completion of the requisite service period. RSU’s are classified as equity. Compensation cost is based on the Company’s stock price on the grant date and is recognized on a straight-line basis over the vesting period for the entire award. On January 28, 2021, the Company granted 22,815 RSU’s to a member of management. The RSU’s vested immediately. The total fair value of the RSU’s granted on January 28, 2021 was $ 45,858 , based on the grant date closing price of $ 2.01 per share. As of September 30, 2021 the Company had issued and vested the following RSU’s: Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value Balance Outstanding at December 31, 2020 - $ - Granted 22,815 0.70 Vested / Released 22,815 - Forfeited - - Cancelled or expired - - Balance outstanding at September 30, 2021 - $ - 13 Table of Contents Note 9 – Common Stock Warrants Certain holders of our warrants issued in private placements in (i) June 2018, exercisable for an aggregate of 283,337 shares of common stock, (ii) July 2019, exercisable for an aggregate of 1,910,540 shares of common stock, and (iii) December 2019, exercisable for an aggregate of 8,958,358 shares of common stock (collectively, the “Private Warrants”) indicated to the Company that they were willing to exercise their Private Warrants at reduced exercise prices. Our board of directors approved the Company’s partially waiving the exercise prices of Private Warrants to provide for reduced exercised prices which resulted in a deemed dividend. Prices were subsequently agreed upon between the Company and each exercising warrant holder, and the Company obtained stockholder approval for the issuance of an aggregate number of shares of the Company’s common stock upon the exercise of Private Warrants greater than 19.99% of the number of shares outstanding prior to any such issuance , in compliance with Nasdaq Listing Rule 5635(d). On December 15, 2020, the Company issued warrants exercisable for 314,291 shares of the Company’s common stock. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $ 0.875 and expire December 15, 2025 . The fair value of these warrants was determined to be $ 171,520 using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 89 %, (ii) discount rate of 0 %, (iii) zero expected dividend yield, and (iv) expected life of 5 years. During the nine months ended September 30, 2021, the Company issued an aggregate of 3,567,899 shares of its common stock upon Private Warrant exercises for net proceeds of $ 2,785,626 . During the nine months ended September 30, 2021, the Company issued an aggregate of 202,887 shares of its common stock upon the cashless exercise election by certain warrant holders. The following table summarizes all stock warrant activity of the Company for the nine months ended September 30, 2021: Number of Warrants Weighted Average Exercise Price Weighted Average Contractual Term (Years) Balance outstanding at December 31, 2020 6,251,103 $ 2.79 2.79 Granted 314,291 0.88 4.21 Exercised ( 3,916,996 ) 0.83 3.10 Forfeited - - - Expired ( 211,234 ) - - Balance outstanding at September 30, 2021 2,437,164 $ 5.54 0.83 Exercisable at September 30, 2021 2,437,164 $ 5.54 0.83 Note 10 – Commitments & Contingencies Office Lease Effective January 1, 2015, the Company entered into an office lease agreement with Green Court, LLC, a Michigan limited liability company, for approximately 3,657 rentable square feet of space, for the initial monthly rent of $ 5,986 , which commenced on January 1, 2015 for an initial term of 60 months. On October 10, 2017 this lease was amended increasing the rentable square feet of space to 3,950 and the monthly rent to $7,798. On July 16, 2019, the Company exercised its option to extend the lease for an additional 5 years past the initial term originally expiring on December 31, 2019 . On March 15, 2021, the Company entered into an amendment to the lease, adding approximately 3,248 rentable square feet, increasing the initial monthly rent to $15,452 effective May 2021, and extending the term of the lease to December 31, 2025 . The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The lease typically does not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s discount rate for operating leases at September 30, 2021 was 10%. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection is considered probable. As a result, the Company has been recognizing rents as they become payable based on the adoption of ASC Topic 842. The weighted-average remaining lease term is 4.25 years. As of September 30, 2021, the maturities of operating lease liabilities are as follows: Operating Lease 2021 $ 46,355 2022 190,963 2023 196,721 2024 202,624 2025 and beyond 202,624 Total $ 839,287 Less: amount representing interest (158,761 ) Present value of future minimum lease payments 680,526 Less: current obligations under leases 127,696 Long-term lease obligations $ 552,830 For the three months ended September 30, 2021 and 2020, the Company incurred rent expenses of $ 53,263 and $ 29,581 , respectively. For the nine months ended September 30, 2021 and 2020, the Company incurred rent expenses of $ 119,802 and $ 90,484 , respectively. Employment and Consulting Agreements Francois Michelon – Effective May 12, 2017, the Company entered into an amended and restated employment agreement with Francois Michelon, the Company’s Chief Executive Officer and Chairman of the board of directors and, on December 27, 2019, entered into an amendment to the employment agreement. The employment agreement provides for an annual base salary that is subject to adjustment at the board of directors’ discretion. The annual base salary in effect during the period covered by this Form 10-Q was $ 376,991 . Under the employment agreement, Mr. Michelon is eligible for an annual cash bonus based upon achievement of performance-based objectives established by the board of directors. Pursuant to Mr. Michelon’s employment agreement, in connection with the closing of the Company’s initial public offering he was granted options to purchase an aggregate 339,270 shares of common stock. The options have a weighted average exercise price of $ 4.96 per share of common stock and vest in three equal annual installments beginning on May 12, 2018. Upon termination without cause, any portion of Mr. Michelon’s option award scheduled to vest within 12 months will automatically vest, and upon termination without cause within 12 months following a change of control, the entire unvested portion of the option award will automatically vest. Upon termination for any other reason, the entire unvested portion of the option award will terminate. If Mr. Michelon’s employment is terminated by the Company without cause or Mr. Michelon terminates his employment for good reason, Mr. Michelon will be entitled to receive 12 months’ continuation of his current base salary and a lump sum payment equal to 12 months of continued healthcare coverage (or 24 months’ continuation of his current base salary and a lump sum payment equal to 24 months of continued healthcare coverage if such termination occurs within one year following a change in control). Under his employment agreement, Mr. Michelon is eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Michael Thornton – Effective May 12, 2017, the Company entered into an amended and restated employment agreement with Michael Thornton, the Company’s Chief Technology Officer and, on December 27, 2019, entered into an amendment to the employment agreement. The term of the employment agreement runs through December 31, 2020 and continues on a year-to-year basis thereafter. The employment agreement provides for an annual base salary that is subject to adjustment at the board of directors’ discretion. The annual base salary in effect during the period covered by this Form 10-Q was $ 289,963 . Under the employment agreement, Mr. Thornton is eligible for an annual cash bonus based upon achievement of performance-based objectives established by the board of directors. Pursuant to Mr. Thornton’s employment agreement, in connection with the closing of the Company’s initial public offering he was granted options to purchase an aggregate 345,298 shares of common stock. The options have a weighted average exercise price of $ 4.96 per share of common stock and vest in three equal annual installments beginning on May 12, 2018. Upon termination without cause, any portion of Mr. Thornton’s option award scheduled to vest within 12 months will automatically vest, and upon termination without cause within 12 months following a change of control, the entire unvested portion of the option award will automatically vest. Upon termination for any other reason, the entire unvested portion of the option award will terminate. If Mr. Thornton’s employment is terminated by the Company without cause or Mr. Thornton terminates his employment for good reason, Mr. Thornton will be entitled to receive 12 months’ continuation of his current base salary and a lump sum payment equal to 12 months of continued healthcare coverage (or 24 months’ continuation of his current base salary and a lump sum payment equal to 24 months of continued healthcare coverage if such termination occurs within one year following a change in control). Under his employment agreement, Mr. Thornton is eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. David Wells – On May 13, 2019, the Company entered into an employment agreement with David Wells that superseded a consulting agreement between the Company and StoryCorp Consulting, pursuant to which Mr. Wells provided services to the Company as its Chief Financial Officer. The employment agreement provides for an annual base salary of $ 230,000 and eligibility for an annual cash bonus to be paid based on attainment of Company and individual performance objectives to be established by the Company’s board of directors (in 2019, the amount of such cash bonus if all goals were achieved would be 30% of the base salary plus base fees paid to StoryCorp under the consulting agreement). The employment agreement also provides for eligibility to receive benefits substantially similar to those of the Company’s other senior executive officers. Pursuant to the employment agreement, on May 13, 2019 Mr. Wells was granted stock options to purchase 56,000 shares of the Company’s common stock. The stock options have an exercise price of $ 1.38 per share, and vest in three equal annual installments beginning on the first anniversary of the grant date. On June 9, 2021, Mr. Wells notified the Company of his resignation as the Company’s Chief Financial Officer, effective June 18, 2021. On June 11, 2021, the Company’s Board of Directors appointed Irina Pestrikova as Senior Director, Finance, effective upon Mr. Wells’ resignation. Ms. Pestrikova will serve as the Company’s Principal Financial Officer in such role. In connection with her appointment, Ms. Pestrikova will receive 75,000 stock options vesting in three equal annual installments. She will receive an annual salary of $ 160,000 . Litigation From time to time the Company may become a party to litigation in the normal course of business. As of September 30, 2021, there were no legal matters that management believes would have a material effect on the Company’s financial position or results of operations. 16 Table of Contents