ENDRA Life Sciences Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 45 Table of Contents I tem 8. Financial Statements and Supplementary Data. Index to Financial Statements ENDRA Life Sciences Inc. December 31, 2022 Page Report of Independent Registered Public Accounting Firm - (Firm ID 587 ) F-1 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-2 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 F-3 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022 and 2021 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-5 Notes to Consolidated Financial Statements for the years ended December 31, 2022 and 2021 F-6 46 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of ENDRA Life Sciences Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of ENDRA Life Sciences Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 and 2021 in conformity with accounting principles generally accepted in the United States of America. The Company's Ability to Continue as a Going Concern The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. We determined that there are no critical audit matters. /s/ RBSM LLP We have served as the Company’s auditor since 2015. New York, NY March 16, 2023 F-1 Table of Contents ENDRA Life Sciences Inc. Consolidated Balance Sheets December 31, December 31, Assets 2022 2021 Current Assets Cash $ 4,889,098 $ 9,461,534 Prepaid expenses 992,875 1,348,003 Inventory 2,644,717 1,284,578 Total Current Assets 8,526,690 12,094,115 Non-Current Assets Fixed assets, net 235,655 131,130 Right of use assets 505,816 643,413 Other assets 5,986 5,986 Total Assets $ 9,274,147 $ 12,874,644 Liabilities and Stockholders’ Equity Current Liabilities Accounts payable and accrued liabilities $ 1,523,012 $ 1,411,437 Lease liabilities, current portion 152,228 132,330 Loans 28,484 - Total Current Liabilities 1,703,724 1,543,767 Long Term Debt Loans, long term - 28,484 Lease liabilities 365,919 518,147 Total Long Term Debt 365,919 546,631 Total Liabilities 2,069,643 2,090,398 Stockholders’ Equity Series A Convertible Preferred Stock, $ 0.0001 par value; 10,000 shares authorized; 141,397 shares issued and outstanding 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; 3,169,103 and 2,127,725 shares issued and outstanding, respectively 317 212 Additional paid in capital 89,068,015 79,460,980 Stock payable 6,073 13,863 Accumulated deficit ( 81,869,902 ) ( 68,690,810 ) Total Stockholders’ Equity 7,204,504 10,784,246 Total Liabilities and Stockholders’ Equity $ 9,274,147 $ 12,874,644 The accompanying notes are an integral part of these consolidated financial statements. F-2 Table of Contents ENDRA Life Sciences Inc. Consolidated Statements of Operations Year Ended Year Ended December 31, December 31, 2022 2021 Operating Expenses Research and development $ 6,554,194 $ 5,482,531 Sales and marketing 1,429,150 1,075,376 General and administrative 5,174,215 4,940,398 Total operating expenses 13,157,559 11,498,305 Operating loss ( 13,157,559 ) ( 11,498,305 ) Other Expenses Gain on extinguishment of debt - 308,600 Other income (expense) ( 21,533 ) ( 41,545 ) Total other expenses ( 21,533 ) 267,055 Loss from operations before income taxes ( 13,179,092 ) ( 11,231,250 ) Provision for income taxes - - Net Loss $ ( 13,179,092 ) $ ( 11,231,250 ) Deemed dividend - ( 121,071 ) Net Loss attributable to common stockholders $ ( 13,179,092 ) $ ( 11,352,321 ) Net loss per share – basic and diluted $ ( 4.56 ) $ ( 5.55 ) Weighted average common shares – basic and diluted 2,891,292 2,046,135 The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents ENDRA Life Sciences Inc. Consolidated Statements of Stockholders’ Equity Year Ended December 31, 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 - $ - 1,702,485 $ 170 $ 64,496,845 10,795 ( 57,338,489 ) 7,169,322 Series A Convertible Preferred Stock converted to common stock ( 55 .397 ) - - - 3,394 - - - - - Common stock issued for cash, net of funding costs - - - - 229,348 23 10,615,952 - - 10,615,975 Common stock issued for warrant exercise - - - - 188,540 19 2,785,608 - - 2,785,627 Common stock issued for option exercise - - - - 1,192 - - - - - Fair value of vested stock options - - - - - - 1,334,112 - - 1,334,112 Stock payable towards preference dividend - - - - - - ( 3,068 ) 3,068 - - Common stock issued for services - - - - 1,626 - 74,000 - - 74,000 Stock issued for RSU - - - - 1,141 - 36,460 - - 36,460 Deemed dividend - - - - - - 121,071 - ( 121,071 ) - Net loss - - - - - - - - ( 11,231,250 ) ( 11,231,250 ) Balance as of December 31, 2021 141 .397 $ 1 - $ - 2,127,726 $ 212 $ 79,460,980 $ 13,863 $ ( 68,690,810 ) 10,784,246 Year Ended December 31, 2022 Series A Convertible Series B Convertible Additional Total Preferred Stock Preferred Stock Common stock Paid in Stock Accumulated Stockholders' Shares Amount Shares Amount Capital Payable Capital Payable Deficit Equity Balance as of December 31, 2021 141 .397 $ 1 - $ - 2,127,726 $ 212 $ 79,460,980 13,863 ( 68,690,810 ) 10,784,246 Common stock issued for cash, net of funding costs - - - - 1,041,377 105 8,399,407 - - 8,399,512 Fair value of vested stock options - - - - - - 1,199,838 - - 1,199,838 Stock paid towards preference dividend - - - - - - 7,790 ( 7,790 ) - - Net loss - - - - - - - - ( 13,179,092 ) ( 13,179,092 ) Balance as of December 31, 2022 141 .397 $ 1 - $ - 3,169,103 $ 317 $ 89,068,015 $ 6,073 $ ( 81,869,902 ) $ 7,204,504 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents ENDRA Life Sciences Inc. Consolidated Statements of Cash Flows Year Ended Year Ended December 31, December 31, 2022 2021 Cash Flows from Operating Activities Net loss $ ( 13,179,092 ) $ ( 11,231,250 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 96,661 116,238 Fixed assets write off 1,391 9,874 Stock compensation expense including common stock issued for RSUs 1,199,838 1,444,572 Amortization of right of use assets 137,597 108,177 Gain on extinguishment of debt - ( 308,600 ) Changes in operating assets and liabilities: Decrease in prepaid expenses 355,128 ( 957,203 ) Increase in inventory ( 1,360,139 ) ( 694,958 ) Increase in accounts payable and accrued liabilities 111,575 491,104 Decrease in lease liability ( 132,330 ) ( 100,338 ) Net cash used in operating activities ( 12,769,371 ) ( 11,122,384 ) Cash Flows from Investing Activities Purchases of fixed assets ( 202,577 ) ( 45,000 ) Net cash used in investing activities ( 202,577 ) ( 45,000 ) Cash Flows from Financing Activities Proceeds from warrant exercise - 2,785,627 Proceeds from issuance of common stock 8,399,512 10,615,975 Net cash provided by financing activities 8,399,512 13,401,602 Net increase (decrease) in cash ( 4,572,436 ) 2,234,218 Cash, beginning of year 9,461,534 7,227,316 Cash, end of year $ 4,889,098 $ 9,461,534 Supplemental disclosures of cash items Interest paid $ 59,113 $ 57,655 Income tax paid $ - $ - Supplemental disclosures of non-cash items Deemed dividend $ - $ 121,071 Conversion of Series A Convertible Preferred Stock $ - $ ( 7 ) Stock dividend payable $ 7,790 $ ( 3,068 ) Right of use asset $ 505,816 $ 643,413 Lease liability $ 518,147 $ 650,477 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents ENDRA Life Sciences Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2022 and 2021 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 December 31, 2022 and through the date of the filing of this Annual Report on Form 10-K. 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 financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States. F-6 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 December 31, 2022 and 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 December 31, 2022 and 2021 the Company recorded a right of use asset of $ 505,816 and $ 643,413 , respectively. At December 31, 2022 and 2021 the Company recorded a lease liability of $ 518,147 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 years ended December 31, 2022 and 2021, the Company incurred $ 6,554,194 and $ 5,482,531 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 410,358 and 392,425 potentially dilutive shares, which include outstanding common stock options, and warrants, as of December 31, 2022 and 2021, respectively. F-7 Table of Contents December 31, 2022 December 31, 2021 Options to purchase common stock 391,902 262,481 Warrants to purchase common stock 10,330 121,818 Shares issuable upon conversion of Series A Convertible Preferred Stock 8,126 8,126 Potential equivalent shares excluded 410,358 392,425 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, 2023, the pool of shares issuable under the Omnibus Plan automatically increased by 867,966 shares from 454,204 shares to 1,322,169 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. 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. F-8 Table of Contents 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 December 31, 2022 of $ 81,869,902 . The Company had working capital of $ 6,822,966 as of December 31, 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 year ended December 31, 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 December 31, 2022 and 2021, inventory consisted of raw materials, subassemblies to be used in the assembly of TAEUS systems, and finished goods. As of December 31, 2022, the Company had no orders pending for the sale of a TAEUS system. As of December 31, 2022 and 2021, the Company had inventory valued at $ 2,644,717 and $ 1,284,578 , respectively. Note 4 - Fixed Assets As of December 31, 2022 and 2021, fixed assets consisted of the following: December 31, 2022 December 31, 2021 Property, leasehold and capitalized software $ 738,720 $ 605,248 TAEUS development and testing 140,617 107,682 Accumulated depreciation ( 643,682 ) ( 581,800 ) Fixed assets, net $ 235,655 $ 131,130 Depreciation expense for the year ended December 31, 2022 and 2021 was $ 96,661 and $ 116,238 , respectively. Note 5 - Accounts Payable and Accrued Liabilities As of December 31, 2022 and 2021, current liabilities consisted of the following: December 31, 2022 December 31, 2021 Accounts payable $ 613,961 $ 791,052 Accrued payroll 60,638 101,459 Accrued bonuses 683,738 396,043 Accrued employee benefits 5,750 5,750 Insurance premium financing 158,925 117,133 Total $ 1,523,012 $ 1,411,437 F-9 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 , due and payable upon the expiration of the initial term on December 31, 2022 , which was later extended to December 31, 2023. 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, 2024. 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 Reverse Stock Split On December 7, 2022, the Company filed with the Secretary of State of the State of Delaware a certificate of amendment (the “Certificate of Amendment”) to its certificate of incorporation, which Certificate of Amendment effectuated as of December 19, 2022 at 12:01 a.m. Eastern Time (the “Effective Time”) a reverse split of the Company’s common stock by a ratio of one-for-20 (the “Reverse Split”). All per share amounts and number of shares in the consolidated financial statements and related notes have been retroactively restated to reflect the Reverse Split. No fractional shares were, or shall be, issued in connection with the Reverse Split. A stockholder who would otherwise be entitled to receive a fractional share of common stock is entitled to receive the fractional share rounded up to the next whole share. The Reverse Split did not change the number of shares of common or preferred stock that the Company is authorized to issue, or the par value of the Company’s common or preferred stock. The Reverse Split resulted in a proportionate adjustment to the per share conversion or exercise price and the number of shares of common stock issuable upon the conversion or exercise of outstanding preferred stock, stock options and warrants, as well as the number of shares of common stock eligible for issuance under the Company’s 2016 Omnibus Incentive Plan. Capital Stock At December 31, 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”), 1,000 shares of its preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”), 100,000 shares of its preferred stock as Series C Preferred Stock, and the remainder of the 9,889,000 preferred shares remain authorized but undesignated. As of December 31, 2022, there were 3,169,103 shares of common stock, 141 .397 shares of Series A Preferred Stock, and no shares of Series B Preferred Stock or Series C Preferred Stock issued and outstanding, and a stock payable balance of $ 6,073 . On September 26, 2022, the board of directors declared a dividend of one one-thousandth of a share of 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 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 (other than shares held by the Company’s directors and named executive officers) entitled the holder thereof to 1,000,000 votes on the proposal to adopt an amendment to the Company’s certificate of incorporation to reclassify the outstanding shares of common stock into a smaller number of shares of common stock. Shares of Series C Preferred Stock were eligible to vote at the special meeting of the Company’s stockholders held on November 29, 2022, at which the Company’s stockholders approved a reverse stock split of its common stock. All shares of Series C Preferred Stock were automatically redeemed in connection with the special meeting and no shares of Series C Preferred Stock remained outstanding as of December 31, 2022. F-10 Table of Contents During the year ended December 31, 2022, the Company issued a total of 1,041,377 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 year ended December 31, 2021, the Company issued a total of 425,241 shares of its common stock, as follows: · 3,394 shares upon the conversion of 55 .397 shares of its Series A Preferred Stock; · 229,348 shares in return for aggregate net proceeds of $ 10,615,975 from sales of common stock; · 178,395 shares upon warrant exercises for an aggregate exercise price of $ 2,785,627 ; · 10,145 shares upon cashless warrant exercises; · 1,192 shares upon cashless option exercise; · 1,626 shares for services valued at $ 74,000 ; and · 1,141 shares for 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 December 31, 2022, under the June 2021 ATM Agreement the Company has issued an aggregate of 1,064,634 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 year ended December 31, 2022, under the June 2021 ATM Agreement the Company issued an aggregate of 1,041,377 shares of common stock in return for net proceeds of $ 8,398,936 , resulting in $ 260,776 of compensation paid to Ascendiant. Note 8 - Common Stock Options and Restricted Stock Units (RSUs) 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 year ended December 31, 2022 was determined to be $ 919,915 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 4.36 %, and (v) expected life of 8 - 10 years. A summary of option activity under the Company’s Omnibus Plan as of December 31, 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 262,481 $ 44.17 7.42 Granted 141,975 8.08 9.05 Exercised - - - Forfeited - - - Cancelled or expired ( 12,554 ) - - Balance outstanding at December 31, 2022 391,902 $ 31.47 7.41 Exercisable at December 31, 2022 180,742 $ 41.21 5.69 F-11 Table of Contents Note 9 - Common Stock Warrants The following table summarizes all stock warrant activity of the Company for the year ended December 31, 2022: Number of Warrants Weighted Average Exercise Price Weighted Average Contractual Term (Years) Balance outstanding at December 31, 2021 121,818 $ 110.80 0.58 Granted - - - Exercised - - - Forfeited - - - Expired ( 111,488 ) 118.86 - Balance outstanding at December 31, 2022 10,330 $ 25.01 1.78 Exercisable at December 31, 2022 10,330 $ 25.01 1.78 Note 10 - Commitments and Contingencies 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 December 31, 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 3.00 years. As of December 31, 2022, the maturities of operating lease liabilities are as follows: Operating Lease 2023 196,721 2024 202,624 2025 and beyond 202,624 Total $ 601,969 Less: amount representing interest ( 83,822 ) Present value of future minimum lease payments 518,147 Less: current obligations under leases ( 152,228 ) Long-term lease obligations $ 365,919 For the years ended December 31, 2022 and 2021, the Company incurred rent expenses of $ 213,912 and $ 178,620 , 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. Effective January 1, 2021, the Compensation Committee increased Mr. Michelon’s annual salary to $ 376,991 and, effective January 1, 2022, it increased Mr. Michelon’s annual salary to $ 423,000 . Mr. Michelon is also eligible for an annual cash bonus based upon achievement of performance-based objectives established by the Board of Directors. 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). F-12 Table of Contents 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. Effective January 1, 2021, the Compensation Committee increased Mr. Thornton’s annual salary to $ 289,963 and, effective January 1, 2022, it increased Mr. Thornton’s annual salary to $ 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. Renaud Maloberti - The Company had an employment agreement with Renaud Maloberti, dated April 15, 2019, that provided 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. Effective January 1, 2021, the Compensation Committee increased Mr. Maloberti’s annual salary to $ 266,255 . On December 21, 2022, Mr. Maloberti notified the Company of his resignation as the Company’s Chief Commercial Officer, effective January 13, 2023. Pursuant to his employment agreement, on April 28, 2019, Mr. Maloberti was granted stock options to purchase 35,000 shares of the Company’s common stock. The stock options have an exercise price of $ 1.04 per share, and vest in three equal annual installments beginning on the first anniversary of the grant date. Litigation From time to time the Company may become a party to litigation in the normal course of business. As of December 31, 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 11 - Income Taxes 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 as of December 31, 2022 and 2021 are summarized below. 2022 2021 Net operating loss carryforward $ ( 17,251,804 ) $ ( 14,200,629 ) Stock based compensation - 28,720 Fair value of options 311,958 346,869 Total deferred tax assets ( 16,939,846 ) ( 13,825,040 ) Valuation allowance $ 16,939,846 $ 13,825,040 Net deferred tax asset $ - $ - In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2022 and 2021, management was unable to determine if it is more likely than not that the Company’s deferred tax assets will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates. F-13 Table of Contents The Company has not completed its evaluation of net operating loss (“NOL”) utilization limitations under Internal Revenue Code, as amended (the “Code”), Section 382/383, change of ownership rules. If the Company has had a change in ownership, the NOL’s would be limited as to the amount that could be utilized each year, or possibly eliminated, based on the Code, as amended. No federal or state/local tax provision has been provided for the years ended December 31, 2022 and 2021 due to the losses incurred during such periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax rate for the years ended December 31, 2021 and 2020. 2022 2021 U.S. federal statutory income tax - 21.00 % - 21.00 % State tax, net of federal tax benefit - 5.80 % - 5.80 % Stock based compensation 0.00 % 0.00 % Change in valuation allowance 26.80 % 26.80 % Effective tax rate 0.00 % 0.00 % At December 31, 2022, the Company has available net operating loss carryforwards for federal and state income tax purposes of approximately $ 65.2 million, of which $ 16 million will begin to expire in 2028 through 2038. ENDRA Life Sciences Canada Inc., the Company’s wholly-owned subsidiary which was incorporated in 2017, is subject to income taxes in the jurisdictions in which it operates, Canada, at a current rate of approximately 26.6 percent for 2022. Significant judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on its current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. ENDRA Life Sciences Canada Inc.’s operations were not material for tax purposes as of December 31, 2022 and 2021 and therefore the entity had no significant impact on the year-end 2022 and 2021 tax provision. Generally, all expenses relating to research & development that are incurred in Canada are the responsibility and owned by the United States parent company, since it is the owner of all of the Company’s intangibles. F-14 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.