ENDRA Life Sciences Inc. 10-Q

Item 1. Financial Statements ENDRA Life Sciences Inc. Condensed Consolidated Balance Sheets September 30, December 31, 2022 2021 Assets Current Assets Cash $ 8,016,350 $ 9,461,534 Prepaid expenses 914,261 1,348,003 Inventory 2,634,077 1,284,578 Total Current Assets 11,564,688 12,094,115 Non-Current Assets Fixed assets, net 230,612 131,130 Right of use assets 541,456 643,413 Other assets 5,986 5,986 Total Assets $ 12,342,742 $ 12,874,644 Liabilities and Stockholders’ Equity Current Liabilities Accounts payable and accrued liabilities $ 1,558,097 $ 1,411,437 Lease liabilities, current portion 147,057 132,330 Total Current Liabilities 1,705,154 1,543,767 Long Term Debt Loans 28,484 28,484 Lease liabilities 405,773 518,147 Total Long Term Debt 434,257 546,631 Total Liabilities 2,139,411 2,090,398 Stockholders’ Equity Series A Convertible Preferred Stock, $ 0.0001 par value; 10,000 shares authorized; 141,397 and 141,397 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; 63,174,455 and 42,554,514 shares issued and outstanding, respectively 6,315 4,254 Additional paid in capital 88,768,831 79,456,938 Stock payable 8,490 13,863 Accumulated deficit ( 78,580,306 ) ( 68,690,810 ) Total Stockholders’ Equity 10,203,331 10,784,246 Total Liabilities and Stockholders’ Equity $ 12,342,742 $ 12,874,644 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, 2022 2021 2022 2021 Operating Expenses Research and development $ 1,830,297 $ 1,173,319 $ 4,890,879 $ 4,059,730 Sales and marketing 420,439 275,565 1,102,381 693,263 General and administrative 1,166,480 1,201,851 3,850,918 3,673,771 Total operating expenses 3,417,216 2,650,735 9,844,178 8,426,764 Operating loss ( 3,417,216 ) ( 2,650,735 ) ( 9,844,178 ) ( 8,426,764 ) Other Expenses Gain on extinguishment of debt - - - 308,600 Other income (expense) ( 23,011 ) ( 7,507 ) ( 45,318 ) ( 8,458 ) Total other expenses ( 23,011 ) ( 7,507 ) ( 45,318 ) 300,142 Loss from operations before income taxes ( 3,440,227 ) ( 2,658,242 ) ( 9,889,496 ) ( 8,126,622 ) Provision for income taxes - - - - Net Loss $ ( 3,440,227 ) $ ( 2,658,242 ) $ ( 9,889,496 ) $ ( 8,126,622 ) Deemed dividend - - - ( 121,071 ) Net Loss attributable to common stockholders $ ( 3,440,227 ) $ ( 2,658,242 ) $ ( 9,889,496 ) $ ( 8,247,693 ) Net loss per share – basic and diluted $ ( 0.05 ) $ ( 0.06 ) $ ( 0.18 ) $ ( 0.20 ) Weighted average common shares – basic and diluted 63,174,455 41,912,535 56,016,219 40,471,906 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents ENDRA Life Sciences Inc. Condensed Consolidated Statements Changes in Stockholders’ Equity (Unaudited) 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 ) $ 14,989,899 Common stock issued for warrant exercise - - - - 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 towards preference dividend - - - - - - ( 4,218 ) 4,218 - - Stock payable 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 Three Months Ended September 30, 2022 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, 2022 141,397 $ 1 - $ - 63,174,455 $ 6,315 $ 88,462,324 5,814 ( 75,140,079 ) 13,334,375 Fair value of vested stock options - - - - - - 309,183 - - 309,183 Stock payable towards preference dividend - - - - - - ( 2,676 ) 2,676 - - Net loss - - - - - - - - ( 3,440,227 ) ( 3,440,227 ) Balance as of September 30, 2022 141,397 $ 1 - $ - 63,174,455 $ 6,315 $ 88,768,831 $ 8,490 $ ( 78,580,306 ) $ 10,203,331 5 Table of Contents 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 towards preference dividend - - - - - - ( 31,870 ) 31,870 - - Common stock issued for services - - - - 32,527 3 74,997 - - 74,000 Stock payable towards RSU's - - - - 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 Nine Months Ended September 30, 2022 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, 2021 141,397 $ 1 - $ - 42,554,514 $ 4,254 $ 79,456,938 13,863 ( 68,690,810 ) 10,784,246 Common stock issued for cash, net of funding costs - - - - 20,619,941 2,061 8,397,451 - - 8,399,512 Fair value of vested stock options - - - - - - 909,069 - - 909,069 Stock payable towards preference dividend - - - - - - 5,373 ( 5,373 ) - - Net loss - - - - - - - - ( 9,889,496 ) ( 9,889,496 ) Balance as of September 30, 2022 141,397 $ 1 - $ - 63,174,455 $ 6,315 $ 88,768,831 $ 8,490 $ ( 78,580,306 ) $ 10,203,331 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, 2022 2021 Cash Flows from Operating Activities Net loss $ ( 9,889,496 ) $ ( 8,126,622 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 64,532 94,977 Stock compensation expense including common stock issued for RSUs 909,069 1,032,835 Stock payable for investor relations - - Amortization of right of use assets 101,957 75,768 Gain on extinguishment of debt - ( 308,600 ) Changes in operating assets and liabilities: Decrease in prepaid expenses 433,742 ( 786,401 ) Increase in inventory ( 1,349,499 ) ( 910,123 ) Increase in accounts payable and accrued liabilities 146,660 528,797 Decrease in lease liability ( 97,647 ) ( 70,289 ) Net cash used in operating activities ( 9,680,682 ) ( 8,469,658 ) Cash Flows from Investing Activities Purchases of fixed assets ( 164,014 ) ( 45,000 ) Net cash used in investing activities ( 164,014 ) ( 45,000 ) Cash Flows from Financing Activities Proceeds from warrant exercise - 2,785,627 Proceeds from issuance of common stock 8,399,512 10,294,899 Net cash provided by financing activities 8,399,512 13,080,526 Net increase (decrease) in cash ( 1,445,184 ) 4,565,875 Cash, beginning of period 9,461,534 7,227,316 Cash, end of period $ 8,016,350 $ 11,793,189 Supplemental disclosures of cash items Interest paid $ - $ 40,887 Income tax paid $ - $ - Supplemental disclosures of non-cash items Deemed dividend $ - $ 121,071 Conversion of Series A Convertible Preferred Stock $ - $ ( 7 ) Stock dividend payable $ - $ ( 31,870 ) Right of use asset $ 541,456 $ 675,822 Lease liability $ 552,830 $ 680,526 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, 2022 and 2021 (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 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 continues impact worldwide macroeconomic conditions, the emergence of variants of the virus and effectiveness of vaccines, 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, 2022 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 subsidiaries 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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet at December 31, 2021 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 twelve months ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2022. 8 Table of Contents 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, 2022 and December 31, 2021, 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 Accounting Standards Update (“ASU”) No. 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. 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, 2022 and December 31, 2021 the Company recorded a right of use asset of $ 541,456 and $ 643,413 , respectively. At September 30, 2022 and December 31, 2021 the Company recorded a lease liability of $ 552,830 and $ 650,477 , respectively. Revenue Recognition ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASC Topic 606”) 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. 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, 2022 and 2021, the Company incurred $ 1,830,297 and $ 1,173,319 of expenses related to research and development costs, respectively. During the nine months ended September 30, 2022 and 2021, the Company incurred $ 4,890,879 and $ 4,059,730 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 8,375,004 and 7,848,899 potentially dilutive shares, which include outstanding common stock options, and warrants, as of September 30, 2022 and December 31, 2021, respectively. 9 Table of Contents 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, 2022 December 31, 2021 Options to purchase common stock 8,005,726 5,249,210 Warrants to purchase common stock 206,753 2,437,164 Shares issuable upon conversion of Series A Convertible Preferred Stock 162,525 162,525 Potential equivalent shares excluded 8,375,004 7,848,899 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, 2022, the pool of shares authorized for issuance under the Omnibus Plan automatically increased by 1,622,848 shares from 7,461,228 shares to 9,084,076 shares. 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. 10 Table of Contents 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, 2022 of $ 78,580,306 . The Company had working capital of $ 9,859,534 as of September 30, 2022. 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 and will require additional financing to fund its future planned operations, including research and development and commercialization of its products. The accompanying financial statements for the period ended September 30, 2022 have been prepared assuming the Company will continue as a going concern, but 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. 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, 2022 and December 31, 2021, inventory consisted of raw materials, subassemblies to be used in the assembly of TAEUS systems, and finished goods. As of September 30, 2022, the Company had no orders pending for the sale of a TAEUS system. As of September 30, 2022 and December 31, 2021, the Company had inventory valued at $ 2,634,077 and $ 1,284,578 , respectively. Note 4 - Fixed Assets As of September 30, 2022 and December 31, 2021, fixed assets consisted of the following: September 30, 2022 December 31, 2021 Property, leasehold and capitalized software $ 733,461 $ 605,248 TAEUS development and testing 143,482 107,682 Accumulated depreciation ( 646,331 ) ( 581,800 ) Fixed assets, net $ 230,612 $ 131,130 Depreciation expense for the three months ended September 30, 2022 and 2021 was $ 23,793 and $ 29,823 , respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $ 64,532 and $ 94,977 , respectively. Note 5 - Accounts Payable and Accrued Liabilities As of September 30, 2022 and December 31, 2021, current liabilities consisted of the following: September 30, 2022 December 31, 2021 Accounts payable $ 636,695 $ 791,052 Accrued payroll 164,357 101,459 Accrued bonuses 517,195 396,043 Accrued employee benefits 5,750 5,750 Insurance premium financing 234,100 117,133 Total $ 1,558,097 $ 1,411,437 11 Table of Contents 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. 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, 2022, 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, 2022, there were 63,174,455 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 $ 8,490 . During the nine months ended September 30, 2022, the Company issued a total of 20,619,941 shares of its common stock in return for aggregate net proceeds of $ 8,399,512 under the June 2021 ATM Agreement (as described below). 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; ● 32,527 shares for services valued at $ 74,000 ; and ● 22,815 shares upon vesting of restricted stock units (“RSUs”) valued at $ 36,460 . At-the-Market Equity Offering Program On June 21, 2021, the Company entered into the At-The-Market Issuance Sales Agreement with Ascendiant (the “June 2021 ATM Agreement”) 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. As of September 30, 2022, under the June 2021 ATM Agreement the Company has issued an aggregate of 21,292,682 shares of common stock in return for net proceeds of $ 9,216,618 , resulting in approximately $ 286,289 of compensation paid to Ascendiant. During the nine months ended September 30, 2022, under the June 2021 ATM Agreement the Company has issued an aggregate of 20,619,941 shares of common stock in return for net proceeds of $ 8,398,936 , resulting in $ 260,776 of compensation paid to Ascendiant. 12 Table of Contents Note 8 - Common Stock Options Common Stock Options Stock options are awarded to the Company’s employees, consultants and non-employee members of the board of directors under 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, 2022 was determined to be $ 909,072 using the Black-Scholes-Merton option-pricing model based on the following assumptions: (i) volatility rate of 74 % to 99 %, (ii) discount rate of 0 %, (iii) zero expected dividend yield, (iv) risk free rate of 1.37 % to 3.37 %, and (v) expected life of 8 - 10 years. A summary of option activity under the Company’s Omnibus Plan as of September 30, 2022, and changes during the year then ended, is presented below: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Balance outstanding at December 31, 2021 5,249,210 $ 2.21 7.42 Granted 2,804,285 0.41 9.38 Exercised - - - Forfeited - - - Cancelled or expired ( 47,769 ) - - Balance outstanding at September 30, 2022 8,005,726 $ 1.58 7.62 Exercisable at September 30, 2022 3,142,632 $ 2.28 5.68 Note 9 - Common Stock Warrants Warrant Conversions and Consent Solicitation The following table summarizes all stock warrant activity of the Company for the nine months ended September 30, 2022: Number of Warrants Weighted Average Exercise Price Weighted Average Contractual Term (Years) Balance outstanding at December 31, 2021 2,437,164 $ 5.54 0.58 Granted - - - Exercised - - - Forfeited - - - Expired ( 2,230,411 ) 5.94 - Balance outstanding at September 30, 2022 206,753 $ 1.25 2.03 Exercisable at September 30, 2022 206,753 $ 1.25 2.03 Note 10 - Commitments and 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, 2022 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 3.25 years. 13 Table of Contents As of September 30, 2022, the maturities of operating lease liabilities are as follows: Operating Lease 2022 47,741 2023 196,721 2024 202,624 2025 and beyond 202,624 Total $ 649,710 Less: amount representing interest ( 96,879 ) Present value of future minimum lease payments 552,830 Less: current obligations under leases ( 147,057 ) Long-term lease obligations $ 405,773 For the three months ended September 30, 2022 and 2021, the Company incurred rent expenses of $ 53,698 and $ 53,263 , respectively. For the nine months ended September 30, 2022 and 2021, the Company incurred rent expenses of $ 160,302 and $ 119,802 , respectively. Employment and Consulting Agreements Francois Michelon - The Company has an employment agreement with Francois Michelon, the Company’s Chief Executive Officer and Chairman of the board of directors, dated May 12, 2017 and amended on December 27, 2019. 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 $423,000. 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. 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 - The Company has an employment agreement with Michael Thornton, the Company’s Chief Technology Officer, dated May 12, 2017 and on December 27, 2019. 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 $ 324,000 . 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. 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. 14 Table of Contents Renaud Maloberti - The Company has an employment agreement with Renaud Maloberti, dated April 15, 2019, that provides for an annual base salary of $ 250,000 and eligibility for an annual cash bonus to be paid based on attainment of Company and individual performance objectives to be established by the Board of Directors. The annual base salary in effect during the period covered by this Form 10-Q was $296,000. The employment agreement also provides for eligibility to receive benefits substantially similar to those of the Company’s other senior executive officers. Upon termination without cause that is not the result of death or disability within 12 months following a change in control, the entire unvested portion of the award will automatically vest without any limitation upon sales. Upon termination for any other reason, the entire unvested portion of the award will terminate. If the termination is for cause, the vested portion of the award will also terminate. Unless terminated sooner, the term of Mr. Maloberti’s employment agreement renews on a year-to-year basis. If Mr. Maloberti’s employment is terminated by the Company without cause (as defined in the Omnibus Plan), Mr. Maloberti will be entitled to receive, subject to his execution of a standard release agreement, 8 months’ continuation of his current base salary and a lump sum payment equal to 8 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. Maloberti is eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Litigation From time to time the Company may become a party to litigation in the normal course of business. As of September 30, 2022, there were no legal matters that management believes would have a material effect on the Company’s financial position or results of operations. Note 12 - Subsequent Events On September 26, 2022, the Company’s board of directors declared a dividend of one one-thousandth of a share of Series C Preferred Stock, par value $ 0.0001 per share (“Series C Preferred Stock”), for each outstanding share of the Company’s common stock, and 1.359 shares of Series C Preferred Stock for each outstanding share of Series A Convertible Preferred Stock, to stockholders of record at 5:00 p.m. Eastern Time on October 7, 2022. Each whole share of Series C Preferred Stock entitles the holder thereof to 1,000,000 votes (and each fraction of a share of Series C Preferred Stock will have a ratable number of votes) on any proposal to adopt an amendment to the Company’s certificate of incorporation to reclassify the outstanding shares of the Company’s common stock into a smaller number of shares at a ratio specified in or determined in accordance with the terms of such amendment (the “Reverse Stock Split”). All shares of Series C Preferred stock that are not present in person or by proxy at any meeting of stockholders held to vote on the Reverse Stock Split as of immediately prior to the opening of the polls at such meeting will automatically be redeemed in whole by the Company without further action on the part of the Company or the holder of shares of Series C Preferred Stock. Any outstanding shares of Series C Preferred Stock that are not redeemed at such time will be redeemed (i) if such redemption is ordered by the Company’s board of directors in its sole discretion, automatically and effective on such time and date specified by the board of directors or (ii) automatically upon the approval by the Company’s stockholders of the Reverse Stock Split at any meeting of stockholders held for the purpose of voting on such proposal. Each share of Series C Preferred Stock redeemed in any redemption described above will be redeemed for no consideration. The Series C Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of the Company. No shares of Series C Preferred Stock may be transferred by the holder thereof except in connection with a transfer by such holder of shares of Common Stock or Series A Preferred Stock, as applicable, of such holder, in which case a number of (i) one one-thousandths (1/1,000ths) of a share of Series C Preferred Stock equal to the number of shares of Common Stock to be transferred by such holder or (ii) a number of shares of Series C Preferred Stock issued in respect of each share of Series A Preferred Stock to be transferred will be automatically transferred to the transferee of such shares of Common Stock or Series A Preferred Stock, as applicable. The foregoing description of the Series C Preferred Stock does not purport to be complete and is qualified in its entirety by reference to the Certificate of Designations of Series C Preferred Stock, which is filed as Exhibit 4.5 hereto. 15 Table of Contents