UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended
| Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from____to _______
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes ☒
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of common stock as of August 28, 2023
EXPLANATORY NOTE
TABLE OF CONTENTS
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1: | Financial Statements | 3 |
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 4 |
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 9 |
| Item 4: | Controls and Procedures | 9 |
| PART II – OTHER INFORMATION | ||
| Item 1: | Legal Proceedings | 10 |
| Item 1A: | Risk Factors | 11 |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 11 |
| Item 3: | Defaults Upon Senior Securities | 11 |
| Item 4: | Mine Safety Disclosures | 11 |
| Item 5: | Other Information | 11 |
| Item 6: | Exhibits | 12 |
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Our unaudited consolidated financial statements included in this Amended Form 10-Q/A are as follows:
These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended December 31, 2022 are not necessarily indicative of the results that can be expected for the full year.
| 3 |
ENDEXX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Inventory, net of allowance of $ | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Investment in marketable securities | ||||||||
| Property and equipment, net of accumulated depreciation of $ | ||||||||
| Right of use asset | ||||||||
| Intangible - website domains | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, Mezzanine Equity and Stockholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Payroll and taxes payable, including related party | ||||||||
| Notes payable, current portion, net of discount of $ | ||||||||
| Convertible notes payable, net of discount of $ | ||||||||
| Line of credit | ||||||||
| Derivative liability | ||||||||
| Lease liability right of use | ||||||||
| Total current liabilities | ||||||||
| Notes payable, net of current portion and net of discount of $ | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Mezzanine equity | ||||||||
| Series H preferred stock, issued and outstanding, respectively | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock, $ Par Value, share authorized | ||||||||
| Series A preferred stock, issued and outstanding, respectively | ||||||||
| Common stock, $ Par Value, share authorized, and issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total liabilities, mezzanine equity and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
ENDEXX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Depreciation | ||||||||
| Advertising and promotion | ||||||||
| Payroll expenses | ||||||||
| Professional fees | ||||||||
| Research and development | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other (income) and expense | ||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||
| Financing costs and discount amortization | ||||||||
| Interest expenses | ||||||||
| Gain on settlement of liabilities | ( | ) | ||||||
| Total other (income) expense | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to non-controlling interest | ( | ) | ||||||
| Net loss attributable to Endexx shareholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share - basic | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding - basic | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
ENDEXX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
Preferred Stock - Series A | Preferred Stock - Series Z | Common Stock | Additional | Accumulated | Non- controlling | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Paid-in Capital | Deficit | Interest | Total | |||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | | $ | | $ | | | $ | | $ | | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for financing | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued for financing | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Shares issued for settlement of liabilities | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
ENDEXX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the three months ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Shares issued for financing costs | ||||||||
| Warrants issued for financing costs | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||
| Gain from settlement of liabilities | ( | ) | ||||||
| Bad debt expense | ||||||||
| Impairment expense | ||||||||
| Financing costs | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Right of use asset and liability | ||||||||
| Accounts payable | ||||||||
| Customer deposit | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Accrued interest | ||||||||
| Payroll and taxes payable, primarily related party | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Net cash used in investing activities | ||||||||
| Financing activities: | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Proceeds from notes payable | ||||||||
| Proceeds from line of credit | ||||||||
| Repayments of notes payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash | $ | ( | ) | $ | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Debt discount at origination | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
ENDEXX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Basis of Presentation
We were incorporated under the laws of State of Nevada on September 5, 1997, as Micron Solutions. From 2002-2005, the Company operated as Panamed Corporation, a biotech service and licensing company. Panamed Corporation merged with Visual Board Books Inc. (VBB) in February 2005 and changed the consolidated company name to Endexx Corporation (the Company).
Our primary business is the manufacturing and sale of hemp products and organic, plant-based, all-natural, zero-nicotine vape products. The Company has the following operating subsidiaries:
| ● | CBD Unlimited, Inc. (70% owner) | |
| ● | Khode, LLC (70% owner) | |
| ● | Hyla US Holdco Limited (51% owner) |
Basis of Presentation and Going Concern
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates. The operating results of the above listed wholly owned subsidiaries were consolidated with the consolidated financial statements of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
Our consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have sustained operating losses since inception, which raises substantial doubt about the Company’s ability to continue as a going concern.
As
of December 31, 2022, we have a working capital deficit of $
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the interim reporting rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments (unless otherwise indicated), necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
| F-5 |
2. Summary of Significant Accounting Policies
Use of Estimates
The Company’s financial statement preparation requires that management make estimates and assumptions which affect the reporting of assets and liabilities and the related disclosure of contingent assets and liabilities in order to report these financial statements in conformity with GAAP. Actual results could differ from those estimates.
Cash
Cash
includes all highly liquid investments that are readily convertible to known amounts of cash and have original maturities at the date
of purchase of three months or less. There were no cash equivalents as of December 31, 2022 and September 30, 2022. The Company maintains
its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC
provides coverage of up to $
Accounts Receivable
Accounts receivable consists of invoiced and unpaid product sales. The Company records an allowance for doubtful accounts to allow for any amounts that may not be recoverable, which is based on an analysis of the Company’s prior collection experience, customer credit worthiness, and current economic trends. Accounts are considered delinquent when payments have not been received within the agreed upon terms and are written off when management determines that collection is not probable.
Inventory
Inventory is composed of finished goods, in-process, and raw goods inventory, valued at the lower of cost or net realizable value, and includes production cost, product freight in, and packaging costs. Slow moving and obsolete inventories are written down based on a comparison of on-hand quantities to historical and projected usages.
The Company has authorized a consignment inventory arrangement with one of its mass retail customers. After consignment inventory has been sold by this customer, the customer notifies the Company of the sale and the Company records revenue in that accounting period. The Company authorizes the replenishment of consignment inventory based on orders placed by the customer. The Company is provided with weekly reports of consignment sales activity and balances.
Prepaid Expenses
The
Company considers all items incurred for future products and services to be prepaid expenses. At December 31, 2022 and September 30,
2022, the Company had prepaid expenses totaling $
| F-6 |
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.
Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:
| Computer equipment and software | |
| Business equipment and fixtures | |
| Property and buildings |
Intangible Assets
Intangible assets are amortized over their estimated useful lives. Each period, the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. Management tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Impairment Assessment
The Company evaluates intangible assets and other long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions or other events that indicate an asset’s carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future cash flows the asset is expected to generate. If the cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.
Customer Deposits
From time-to-time the Company receives payment from customers in advance of delivering products to the customer. All such deposits are short term in nature as the Company delivers the product, unfulfilled portions, or engineering services to the customer before the end of its next annual fiscal period. These deposits are credited to the customer against product deliveries or at the completion of the customer’s order.
Revenue Recognition
Revenue is recognized from the sale of hemp products when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of hemp products) is satisfied upon the shipment of products to our customers, which is also when control is transferred. The transfer of control of products to our customers is typically based on written sales terms that do not allow for a right of return after 30 days from the date of purchase. Revenue is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
The following table presents the Company’s revenues disaggregated by customer type for the periods ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Wholesale | $ | $ | ||||||
| Retail | ||||||||
| $ | $ | |||||||
| F-7 |
The following table presents the Company’s revenues disaggregated by location for the periods ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| USA | % | % | ||||||
| Russia | % | * | ||||||
| Georgia | % | * | ||||||
| Switzerland | % | * | ||||||
| * = Less than 10% | ||||||||
The following table presents the Company’s revenues from significant customers for the periods ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Customer A | % | * | ||||||
| Customer B | % | * | ||||||
| Customer C | % | * | ||||||
| * = Less than 10% | ||||||||
Financial Instruments
In accordance with the reporting requirements of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liability.
Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the periods ended December 31, 2022 and 2021, except as disclosed.
Fair Value Measurement
ASC Topic 820, Fair Value Measurements, provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
| F-8 |
Level 2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value.
The following tables present the Company’s assets and liabilities that were measured and recognized at fair value as of December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative liability | ||||||||||||||||
| September 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative liability | ||||||||||||||||
Under the Company’s contract ordering policy, the Company first considers common shares issued and outstanding as well as reserved but unissued equity awards, such as under an equity award program. All remaining equity linked instruments such as, but not limited to, options, warrants, and debt and equity with conversion features are evaluated based on the date of issuance. If the number of shares which may be issued under the Company’s agreements exceed the authorized number of shares or are unable to be determined, equity linked instruments from that date forward are considered to be derivative liabilities until such time as the number of shares which may be issued under the Company’s agreements no longer exceed the authorized number of shares and are able to be determined.
During August 2022, the Company issued a note agreement containing provisions meeting the definition of a derivative liability which therefore require bifurcation. Further, pursuant to the Company’s contract ordering policy, any issuances of equity linked instruments subsequent to August 31, 2022, will result in derivative liabilities.
At
September 30, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the promissory note based
on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following weighted-average inputs: the price of the Company’s
common stock of $
At
December 31, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the promissory note based on
assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following weighted-average inputs: the price of the Company’s
common stock of $
A reconciliation of the changes in the Company’s Level 3 derivative liability at fair value is as follows:
| Balance - September 30, 2022 | $ | |||
| Change in fair value | ( | ) | ||
| Balance - December 31, 2022 | $ | |||
| Balance - September 30, 2021 | $ | |||
| Change in fair value | ( | ) | ||
| Balance - December 31, 2021 | $ |
| F-9 |
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Beneficial Conversion Features
ASC 470-20 applies to convertible securities with beneficial conversion features that must be settled in stock and to those that give the issuer a choice in settling the obligation in either stock or cash. ASC 470-20 requires that the beneficial conversion feature should be valued at the commitment date as the difference between the conversion price and the fair market value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. This amount is recorded as a debt discount and amortized over the life of the debt. ASC 470-20 further limits this amount to the proceeds allocated to the convertible instrument.
Research and development costs
Research
and development costs are charged to expense as incurred and are included in operating expenses. Total research and development costs
were $
Advertising Costs
The
costs of advertising are expensed as incurred. Advertising expenses are included in the Company’s operating expenses. Advertising
expense were $
Income Taxes
The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
The Company follows ASC 740-10, Accounting for Uncertainty in Income Taxes. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The Company evaluates its tax positions on an annual basis, and as of December 31, 2022, no additional accrual for income taxes is necessary. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception. The Company is required to file income tax returns in the U.S. federal tax jurisdiction and in various state tax jurisdictions and the prior three fiscal years remain open for examination by federal and/or state tax jurisdictions. The Company is currently not under examination by any other tax jurisdictions for any tax year.
| F-10 |
FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Preferred H | ||||||||
| Warrants | ||||||||
| Options | ||||||||
| Convertible debt | ||||||||
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when management assesses that it is probable that a liability has been incurred and the amount can be reasonable estimated.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (a) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (b) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (c) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the “if-converted” method. In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. For smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact that ASU 2020-06 may have on its consolidated financial statements and related disclosures.
As of December 31, 2022, there were several new accounting pronouncements issued by the Financial Accounting Standards Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
| F-11 |
3. Inventory
The Company’s inventory consisted of the following at the respective balance sheet dates:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Raw materials and packaging components | $ | $ | ||||||
| Finished goods | ||||||||
| Consigned goods | ||||||||
| Apparel | ||||||||
| Less obsolescence allowance | ( | ) | ( | ) | ||||
| $ | $ | |||||||
4. Property and Equipment
The Company’s property and equipment consisted of the following at the respective balance sheet dates:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Computer/office equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
5. Debt
Line of credit
On
November 29, 2022, the Company entered into a
Notes payable
The Company’s notes payable as of December 31, 2022, are summarized as follows:
| Noteholder | Origination | Maturity | Interest | Principal | Discount | |||||||||||||||
| Noteholder A1 | % | $ | $ | |||||||||||||||||
| Noteholder A2 | % | |||||||||||||||||||
| Noteholder A3 | % | |||||||||||||||||||
| Noteholder B | * | % | ||||||||||||||||||
| Noteholder B | * | % | ||||||||||||||||||
| Noteholder C | ** | % | ||||||||||||||||||
| Noteholder C | % | |||||||||||||||||||
| Noteholder G | * | % | ||||||||||||||||||
| Noteholder F | % | |||||||||||||||||||
| Noteholder D | % | |||||||||||||||||||
| Noteholder I | % | |||||||||||||||||||
| Noteholder J | % | |||||||||||||||||||
| Noteholder K | * | % | ||||||||||||||||||
| Noteholder K | * | % | ||||||||||||||||||
| Noteholder L | - | % | ||||||||||||||||||
| Noteholder M | - | % | ||||||||||||||||||
| Noteholder M | - | % | ||||||||||||||||||
| Noteholder N | - | % | ||||||||||||||||||
| Noteholder O | % | |||||||||||||||||||
| $ | $ | |||||||||||||||||||
| * | |
| ** |
| F-12 |
The Company’s notes payable as of September 30, 2022, are summarized as follows:
| Noteholder | Origination | Maturity | Interest | Principal | Discount | |||||||||||||||
| Noteholder A1 | % | $ | $ | |||||||||||||||||
| Noteholder A2 | % | |||||||||||||||||||
| Noteholder A3 | % | |||||||||||||||||||
| Noteholder B | * | % | ||||||||||||||||||
| Noteholder B | % | |||||||||||||||||||
| Noteholder C | % | |||||||||||||||||||
| Noteholder C | % | |||||||||||||||||||
| Noteholder G | * | % | ||||||||||||||||||
| Noteholder F | % | |||||||||||||||||||
| Noteholder D | % | |||||||||||||||||||
| Noteholder I | % | |||||||||||||||||||
| Noteholder J | % | |||||||||||||||||||
| Noteholder K | * | % | ||||||||||||||||||
| Noteholder K | % | |||||||||||||||||||
| Noteholder L | - | % | ||||||||||||||||||
| Noteholder M | - | % | ||||||||||||||||||
| Noteholder M | - | % | ||||||||||||||||||
| Noteholder N | - | % | ||||||||||||||||||
| Noteholder O | % | |||||||||||||||||||
| $ | $ | |||||||||||||||||||
| * |
At
December 31, 2022 and September 30, 2022, accrued interest related to notes payable totaled $
Convertible notes payable
The Company’s convertible notes payable as of December 31, 2022, are summarized as follows:
| Noteholder | Origination | Maturity | Interest | Conversion | Principal | Discount | ||||||||||||||||||
| Noteholder C | % | $ | ||||||||||||||||||||||
| Noteholder D | % | $ | ||||||||||||||||||||||
| Noteholder E | * | % | $ | |||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||
| * |
The Company’s convertible notes payable as of September 30, 2022, are summarized as follows:
| Noteholder | Origination | Maturity | Interest | Conversion | Principal | Discount | ||||||||||||||||||
| Noteholder C | % | $ | ||||||||||||||||||||||
| Noteholder D | % | $ | ||||||||||||||||||||||
| Noteholder E | * | % | $ | |||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||
| * |
| F-13 |
At
December 31, 2022 and September 30, 2022, accrued interest related to convertible notes payable totaled $
Future maturities
Future maturities of the Company’s debt as of December 31, 2022 are as follows:
| September 30, 2023 | $ | |||
| September 30, 2024 | ||||
| September 30, 2025 | ||||
| September 30, 2026 | ||||
| September 30, 2027 | ||||
| Thereafter | ||||
| $ |
6. Payroll and Payroll Taxes Payable
The Company’s payroll and payroll taxes payable consisted of the following at the respective balance sheet dates:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Accrued payroll - Officer | $ | $ | ||||||
| Accrued payroll - Employee | ||||||||
| Accrued payroll taxes | ||||||||
| $ | $ | |||||||
7. Stockholders’ Deficit
On January 25, 2021, the Company amended its articles of incorporation to increase its authorized shares to shares and shares of the Company’s common stock and preferred stock, respectively.
The
Company’s common stock shares have equal voting rights, are non-assessable and have
The
Company’s Series A Preferred Stock shares have voting rights in the
The
Company’s Series H Preferred Stock shares have
The
Company’s Series Z Preferred Stock shares have
| F-14 |
Warrants
A summary of the status of the Company’s warrant grants as of December 31, 2022 and the changes during the three months then ended is presented below:
| Weighted-Average | ||||||||||
| Weighted-Average | Remaining | |||||||||
| Warrants | Exercise Price | Contractual Life | ||||||||
| Outstanding and Exercisable at September 30, 2022 | $ | years | ||||||||
| Outstanding and Exercisable at December 31, 2022 | $ | years | ||||||||
Options
| Weighted-Average | ||||||||||
| Weighted-Average | Remaining | |||||||||
| Options | Exercise Price | Contractual Life | ||||||||
| Outstanding and Exercisable at September 30, 2022 | $ | years | ||||||||
| Outstanding and Exercisable at December 31, 2022 | $ | years | ||||||||
8. Commitments and Contingencies
Settlement
During
October 2022, the Company settled a dispute with the Company’s former Chief Medical Officer. As part of the settlement, the Company
paid compensation totaling $
Serious Promotions, Inc.
In
June 2022, Serious Promotions, Inc. filed a Petition before the American Arbitration Association seeking monetary damages against Khode,
LLC. Serious Promotions alleges that Khode failed to make certain payments of fees related to the Endorsement and License Agreement entered
into by Serious Promotions and its president Khaled Mohamed Khaled (p/k/a DJ Khaled). Serious Promotions seeks $
In
July 2022, Khode, joined as a party by the Company, filed counterclaims against Serious Promotions, Khaled and Impact Brokers for breach
of the Endorsement and License Agreement and related violations of legal duties, seeking damages in an amount no less than $
Although this arbitration is in its early stages, the Company is confident in its position, will vigorously defend its position, and prosecute its counterclaims, and ultimately expects rulings in its favor.
Contracts and commitments
During
October 2020, the Company entered into a five-year endorsement contract with an American DJ, record executive and producer, and media
personality. Pursuant to the endorsement contract, the Company is to make quarterly payments totaling $
9. Related Party Transactions
Black Mountain Botanical
During
the period ended December 31, 2022, Black Mountain Botanical (BMB), an entity owned by the wife of Mr. Davis, received $
10. Restatement
On
February 22, 2023, the Company filed unaudited financial statements which contained a variety of errors. As part of the unaudited filing,
the Company recorded a $
Revisions outside of the consolidation of Hyla balances and activities which caused variances in reported activity are expanded upon below.
| F-15 |
| Original | Restated | Revisions | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable, net | ( | )(1) | ||||||||||
| Inventory, net | ||||||||||||
| Prepaid expenses | ||||||||||||
| Total current assets | ||||||||||||
| Investment in marketable securities | ||||||||||||
| Equity method investment | ( | ) | ||||||||||
| Note receivable | ( | ) | ||||||||||
| Property and equipment, net | ||||||||||||
| Right of use asset | ||||||||||||
| Prepaid expenses | ||||||||||||
| Intangible - website domains | ||||||||||||
| Goodwill | ||||||||||||
| Total assets | $ | $ | $ | |||||||||
| Liabilities, Mezzanine Equity and Stockholders’ Deficit | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable | $ | $ | $ | |||||||||
| Customer deposits | ||||||||||||
| Accrued expenses | ||||||||||||
| Accrued interest | ||||||||||||
| Payroll and taxes payable, including related party | ||||||||||||
| Notes payable, current portion, net of discount | ( | ) | ||||||||||
| Convertible notes payable, net of discount | ||||||||||||
| Line of credit | ||||||||||||
| Derivative liability | ||||||||||||
| Lease liability right of use | ||||||||||||
| Total current liabilities | ||||||||||||
| Notes payable, net of current portion and net of discount | ||||||||||||
| Total liabilities | ||||||||||||
| Mezzanine equity | ||||||||||||
| Series H preferred stock | (2) | |||||||||||
| Stockholders’ deficit | ||||||||||||
| Series A preferred stock | ||||||||||||
| Series H preferred stock | ( | ) | ||||||||||
| Series Z preferred stock | ||||||||||||
| Common stock | ||||||||||||
| Additional paid-in capital | ( | )(2) | ||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ( | ) | ||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||
| Total liabilities, mezzanine equity and stockholders’ deficit | $ | $ | $ | |||||||||
| F-16 |
| Original | Restated | Revisions | ||||||||||
| Revenues | $ | $ | $ | (1) | ||||||||
| Cost of revenues | ||||||||||||
| Inventory impairment | ( | ) | ||||||||||
| Gross profit (loss) | ( | ) | ||||||||||
| Operating expenses | ||||||||||||
| Depreciation | ||||||||||||
| Advertising and promotion | ||||||||||||
| Payroll expenses | ||||||||||||
| Professional fees | ||||||||||||
| Research and development | ||||||||||||
| General and administrative expenses | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Other (income) and expense | ||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||
| Financing costs and discount amortization | ||||||||||||
| Interest expenses | ||||||||||||
| Loss on settlement of liabilities | ( | ) | ||||||||||
| Total other (income) expense | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | |||||
| Net loss attributable to non-controlling interest | ( | ) | ( | ) | ||||||||
| Net loss attributable to Endexx shareholders | $ | ( | ) | $ | ( | ) | $ | |||||
| Net loss per share - basic | $ | ( | ) | $ | ( | ) | $ | |||||
| Weighted average shares outstanding - basic | ||||||||||||
| F-17 |
| Original | Restated | Revisions | ||||||||||
| Operating activities | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | |||||
| Adjustments to reconcile net loss to net cash used in operating activities: | - | |||||||||||
| Stock-based compensation | ( | ) | ||||||||||
| Shares issued for settlement | ( | ) | ||||||||||
| Shares issued for financing costs | ||||||||||||
| Warrants issued for financing costs | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Amortization of debt discount | ||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||
| Gain from settlement of liabilities | ||||||||||||
| Gain from settlement of derivative liabilities | ||||||||||||
| Gain on disposition of assets | ||||||||||||
| Bad debt expense | ||||||||||||
| Impairment expense | ||||||||||||
| Financing costs | ||||||||||||
| Default penalty | ||||||||||||
| Changes in operating assets and liabilities: | - | |||||||||||
| Accounts receivable | ||||||||||||
| Inventory | ||||||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||||||
| Right of use asset and liability | ||||||||||||
| Accounts payable | ( | ) | ||||||||||
| Customer deposits | ||||||||||||
| Accrued expenses | ||||||||||||
| Accrued interest | ||||||||||||
| Payroll and taxes payable, including related party | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Investing activities: | ||||||||||||
| Net cash used in investing activities | ||||||||||||
| Financing activities: | ||||||||||||
| Proceeds from sale of common stock | ||||||||||||
| Proceeds from convertible notes payable | ||||||||||||
| Proceeds from notes payable | ||||||||||||
| Proceeds from line of credit | ||||||||||||
| Repayment of note payable | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by financing activities | ( | ) | ||||||||||
| Net increase in cash | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Cash, beginning of period | ||||||||||||
| Cash, end of period | $ | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | $ | |||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| (1) | – | |
| (2) | – |
| F-18 |
11. Subsequent Events
During
January 2023, the Company issued shares of common stock valued at approximately $
During
January 2023, the Company entered into a
During
January 2023, the Company entered into an
During
March 2023, the Company entered into an
| F-19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the three months ended December 31, 2022, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”) should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Part I, Item 1 of this Amended Quarterly Report on Form 10-Q/A, as well as our Annual Report on Form 10-K for our fiscal year ended September 30, 2022 (the “Form 10-K”).
Note about Forward-Looking Statements
This Amended Quarterly Report on Form 10-Q/A includes statements that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “intends,” “plans,” “expects,” or “anticipates,” and do not reflect historical facts.
Specific forward-looking statements contained in this portion of the Quarterly Report include, but are not limited to: (i) statements that are based on current projections and expectations about the markets in which we operate, (ii) statements about current projections and expectations of general economic conditions, (iii) statements about specific industry projections and expectations of economic activity, (iv) statements relating to our future operations, prospects, results, and performance, and (v) statements that the cash on hand and additional cash generated from operations together with potential sources of cash through issuance of debt or equity will provide the Company with sufficient liquidity for the next 12 months.
Forward-looking statements involve risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results, future performance and capital requirements and cause them to materially differ from those contained in the forward-looking statements include those identified in our Registration Statement on Form 10 under Item 1A “Risk Factors”, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors may generally affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained on our website: www.endexx.com or any other websites referenced in this Amended Quarterly Report are not part of this Amended Quarterly Report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties, and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclose any obligation to update forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those discussed under “Forward-Looking Statements,” “Item 1. Overview,” and “Item 1A. Risk Factors” sections in this Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
| 4 |
Overview
Endexx® is a Consumer Products (CPG) company specializing in plant-based formulations and innovative delivery systems, focused on creating “Better Products for a Better You”©. Our focus is on developing the most innovative and effective products using all-natural plant-based ingredients. Our companies, CBD Unlimited™ and Hyla™, harness the power of plants and deliver clean ingredient formulations with innovative technology systems.
Through CBD Unlimited, we develop hemp-derived, cannabidiol-based products, each formulated to address key segments of the health and wellness market. Through our subsidiaries, we make available for sale high-end, full-spectrum hemp-derived oils, extracts, topicals, and pet products, all with the shared purpose of supporting the potential of relief of pain and inflammation for humans and pets, through our e-commerce site www.cbdunlimited.com, as well as other online and in-store retailers. Through Hyla, we produce and sell organic, plant-based, all-natural, zero-nicotine, tobacco-free vape products under the Hyla brand. Each “HYLA device” contains a natural guarana extract that is blended with proprietary botanical formulas. Hyla launched its products in October 2021 and its initial inventory (140,000 devices) was sold out the following month. Hyla’s products bear the Underwriters Laboratories global safety certification and are CE approved. All of Hyla’s products are available on its e-commerce site: www.tryhyla.com.
The Company was incorporated in the State of Nevada on September 5, 1997 as Micron Solutions in order to complete a merger with Shillelagh. In November 1997, Shillelagh merged with and into Micron Solutions, with Micron Solutions as the surviving entity. In 2002, Micron Solutions entered into the Exchange Agreement with PanaMed, Inc., and all of its shareholders, pursuant to which PanaMed, Inc. became the Company’s wholly-owned subsidiary. In connection with the Exchange Agreement, Micron also changed its name to PanaMed Corporation.
In June 2005, we filed a Certificate of Amendment to Articles of Incorporation with the Secretary of State of the State of Nevada to change our name to Endexx Corporation. At that time, we adopted our current trading symbol, “EDXC.” In September 2005, PanaMed Corporation acquired VBB, an SaaS provider, through a merger, whereby VBB merged with and into us, and we were the surviving entity. Subsequently, we operated as a diversified technology and SaaS and compliance and tracking systems company, until we shifted our focus to the hemp-derived product industry in August 2014. In October 2018, we changed our name to CBD Unlimited, Inc., and in May 2020, we changed our name back to Endexx Corporation, with CBD Unlimited, Inc., becoming our wholly-owned subsidiary. On January 25, 2021, we filed our Amended and Restated Articles of Incorporation.
Results of Operations
Three Months Ended December 31, 2022 Compared to Three Months Ended December 31, 2021
Revenues
Revenues for the three months ended December 31, 2022 were $491,709, as compared to $274,591 for the three months ended December 31, 2021, a $217,118 (79%) increase. The increase in revenue is attributable to additional revenues realized from Hyla, which was the subject of the transactions contemplated by our Control Acquisition Agreement, that closed effective August 29, 2022 (the “Hyla Transaction”). The increases in revenues are also partly attributable to improved supply-chain, increased consumer spending and increased marketing efforts in promoting the Company’s products.
We expect an increase in commercial revenue over the next 12 months as our business model is implemented and expanded and our commercial and retail accounts continue to grow and expand the products being sold in each of their retail locations. Additionally, we will continue to focus on the development of both current and new products while continuing to commercialize existing products lines.
Gross Profit (Loss)
Gross profit (loss) for the three months ended December 31, 2022 was a profit of 133,867, as compared to a gross profit of $16,255 for the three months ended December 31, 2021. This $117,612 (724%) improvement in gross profit for this period was attributable to the closing of the Hyla Transaction. The improved gross profit was further enhanced by improvements in production costs and decreases in inventory impairment between the periods.
| 5 |
Operating Expenses
Operating expenses for the three months ended December 31, 2022, were $1,330,224, as compared to $1,440,197 for the three months ended December 31, 2021, a decrease of $109,973. The decrease in operating expenses over the prior period can be attributed to lower advertising and promotional expenses, professional fees, payroll fees, and research and development expenses, partially offset by increased general and administrative expenses.
We expect that operating expenses will remain consistent over the next 12 months as our long-term growth strategy will require significant changes in personnel and facilities, offset increased research and development expenses to ensure that products nearing commercialization are brought to market as quickly and as effectively. We cannot provide any assurances that our strategy will be effective.
Other (Income) and Expenses
Other income for the three months ended December 31, 2022 were $137,472, as compared to other expenses of $223,263 for the three months ended December 31, 2021, a $360,735 improvement. The improvement in other income resulted from significant decrease in the change in fair value of derivative liability offset by increases in financing costs and discount amortization and increases int interest expenses,.
Derivative liabilities are associated with loans that are convertible or have variable pricing on the equivalent shares of Common Stock. At the end of each period, these derivative liabilities are valued, and the net change is recorded as a gain or loss in other expense and income.
Loss from Operations and Total Net Loss
Loss from operations for the three months ended December 31, 2022 was $1,196,357, as compared to loss from operations of $1,423,942 for the three months ended December 31, 2021, an improvement in net loss from operations of $227,585. The improvement in loss from operations was the result of an increase in gross revenues, lower costs of revenues and reduced operating expenses.
Total net loss for the three months ended December 31, 2022 was $1,058,885, including $461,990 net loss attributable to non-controlling interest and $596,895 net loss directly attributable to the Company. This compares to a total net loss of $1,647,205 for the three months ended December 31, 2021, fully attributable to the Company. This improvement of $1,050,310 in total net loss attributable to the Company is attributable to improved revenues, lower cost of revenues, lower operating expenses and improved other income.
At the end of each period, derivative liabilities are valued, and the net change is recorded as a gain or loss in other expense and income.
We do not expect to realize net income in the near term as anticipated operational expenses are expected to increase as a result of increased research and development expenses, consulting fees, payroll expenses, and administrative costs as staffing increases. Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss through fiscal 2023 only in part due to the COVID-19 pandemic.
| 6 |
Liquidity and Capital Resources – Three months ended December 31, 2022
Going Concern
We have incurred operating losses since inception and have negative cash flow from operations. As of December 31, 2022, we had a stockholders’ deficit of $11,843,463, a working capital deficit of $15,843,345, an accumulated deficit of $44,995,207 and incurred a net loss of $1,0558,885 in the three months ended December 31, 2022. Additionally, we utilized $1,345,043 in cash for operations and utilized $0 in cash for investing activities during the three months ended December 31, 2022, while we received $694,912 in cash from financing activities. As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flow from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our operations, but there can be no assurance that such financing will be available on terms acceptable to us, if at all.
Our consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow.
As of December 31, 2022, we had a cash position of $6,645. We estimate our operating expenses for the near- and mid-term may continue to exceed the revenues that we may generate, and we may need to raise capital through either debt or equity offerings to continue operations. We are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable risk that we will not be able to raise such financings at all, or on terms that are not overly dilutive to our existing stockholders. We can offer no assurance that we will be able to raise such funds. If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and we may be forced to reduce or discontinue operations.
There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.
Cash Flow – Operating Activities
For the three months ended December 31, 2022, our cash used in operating activities amounted to an outflow of $1,345,043, compared to cash used during the three months ended December 31, 2021 of $945,911. The $399,132 increase in cash used in our operating activities is due to changes in the fair value of derivative liabilities, decreases in pre-paid expenses, partially offset by increases in accounts receivable.
Cash Flow – Financing Activities
For the three months ended December 31, 2022, our cash provided by financing activities amounted to $694,912, which includes $0 in proceeds received from the sale of our Common Stock, $0 in proceeds from the issuance of convertible notes, $0 in proceeds from the issuance of notes payable and $883,145 in proceeds from lines of credit, offset by $188,233 repayment of notes payable.
| 7 |
For the three months ended December 31, 2021, our cash provided by financing activities amounted to $1,116,833, which includes $0 in proceeds received from the sale of our Common Stock, $999,853 in proceeds from the issuance of convertible notes, and $116,980 in proceeds from the issuance of notes payable.
Cash Flow – Investing Activities
Net cash used in investing activities in the three months ended December 31, 2022 and 2021 was $0 and $0, respectively.
Accounts Receivable and Allowance for Doubtful Account Receivable
Accounts receivable are recorded at net realizable value. We determine provisions for uncollectible accounts, sales returns, and claims based upon factors including the credit risk and activity of specific distributors and resellers, historical trends, and other information. If we become aware of a specific distributor’s or reseller’s inability to meet its financial obligations, bad debt charges are recorded based on an overall assessment of past due accounts receivable outstanding. In the opinion of management, a provision was deemed necessary for uncollectible accounts.
Inventory
The cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method. Our inventories are valued at the lower of cost or net realizable value. Our inventory consists almost entirely of finished and unfinished goods, and freight, which include vapes, CBD creams, oils, capsules, and sprays. We periodically evaluate and adjust inventories for obsolescence. In the opinion of management, no provision for obsolescence is deemed necessary. The shelf life of all beverage inventory is two years. As of December 31, 2022, we had approximately $730,532 of product in inventory, which was a decrease of approximately $47,380, compared to approximately $777,912 at September 30, 2022. We expect the balance of inventory to increase in direct relation to the increase in sales that we expect.
Goodwill and Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. We have selected December 31 as the date to perform the annual impairment test.
Intangible assets represent both indefinite lived and definite lived assets. Trademarks are deemed to have definite useful lives of ten years, are amortized, and are tested annually for impairment. Intangible assets are reported on the balance sheet at cost less accumulated amortization. We have selected December 31 as the date to perform the annual impairment test.
Stock-Based Compensation
FASB’s ASC Topic 718, Stock Compensation (formerly, FASB Statement 123R), prescribes accounting and reporting standards for all stock-based payment transactions in which employee and non-employee services are acquired. We measure the cost of employee and non-employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Fair value for restricted stock awards is valued using the closing price of our Common Stock on the date of grant. For the three months ended December 31, 2022 and 2022, we recognized stock-based compensation expense of approximately $0, and $300,000 respectively.
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Off Balance Sheet Arrangements
As of December 31, 2022 and December 31, 2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to stockholders.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
As a Smaller Reporting Company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure control and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2022, the period covered in this Report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
In June 2022, Serious Promotions, Inc. filed a Petition before the American Arbitration Association seeking monetary damages against Khode, LLC, a joint venture entered into by Serious Promotions and us. Serious Promotions alleges that Khode failed to make certain payments of fees related to the Endorsement and License Agreement entered into by Serious Promotions and its president Khaled Mohamed Khaled (p/k/a DJ Khaled). Serious Promotions seeks $6,250,000 in damages.
In July 2022, Khode, joined as a party by us, filed counterclaims against Serious Promotions, Khaled and Impact Brokers for breach of the Endorsement and License Agreement and related violations of legal duties, seeking damages in an amount no less than $100,000,000.
Although this arbitration is in its early stages, we are confident in our position, will vigorously defend our position, and prosecute our counterclaims, and ultimately expect a ruling in our favor.
We know of no other material proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries, including, but not limited to:
| (a) | any petition under the federal bankruptcy laws or any state insolvency laws filed by or against, or an appointment of a receiver, fiscal agent, or similar officer by a court for the business or property of such person, or any partnership in which such person was a general partner at or within two years before the time of such filing, or any corporation or business association of which such person was an executive officer at or within two years before the time of such filing; | |
| (b) | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| (c) | being subject to any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining such person from, or otherwise limiting, the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association, or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; engaging in any type of business practice; or (ii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; |
| (d) | being the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (c)(i) above, or to be associated with persons engaged in any such activity; | |
| (e) | being found by a court of competent jurisdiction (in a civil action), the Commission to have violated a federal or state securities or commodities law, and the judgment in such civil action or finding by the Commission has not been reversed, suspended, or vacated; | |
| (f) | being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated; | |
| (g) | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended, or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| (h) | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority over its members or persons associated with a member. |
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Item 1A. Risk Factors
We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We issued the following promissory note convertible into shares of our Common Stock in the three months ended December 31, 2022:
None.
We granted the following warrants exercisable for shares of our Common Stock in the three months ended December 31, 2022:
None.
We granted the following shares of Common Stock as payment for services rendered to the Company in the three months ended December 31, 2022:
In November 2022, the Company issued 1,719,100 shares of common stock as payment for a September 2022 invoice for consulting services totaling $103,000.
| Date | Shares | Expense | |||||||
| 11/15/2022 | 1,719,100 | $ | 106,584 | ||||||
We issued the following shares of Common Stock as part of settlement agreements in the three months ended December 31, 2022:
In November 2022, we issued to two persons an aggregate of 1,000,000 shares of common stock valued at $60,000 in connection with a settlement agreement. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the shares of common stock were issued by us in a transaction not involving any public offering).
During October 2021, the Company agreed to extend the maturity date of a May 2021 note agreement with one of its noteholders and, in connection with the extension, the Company issued 2,562,500 shares of common stock valued at $135,813. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the shares of common stock were issued by us in a transaction not involving any public offering).
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed with or incorporated by reference into this Amended Quarterly Report.
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*- Filed Herewith.
** - Filed as exhibits with equivalent exhibit numbers to our Registration Statement on Form 10, filed with the Commission on March 4, 2021, each of which is incorporated herein by reference thereto.
^ - Filed as exhibits with equivalent exhibit numbers to our Pre-Effective Amendment No. 1 to our Registration Statement on Form 10, filed with the Commission on April 8, 2021, each of which is incorporated herein by reference thereto.
# - Filed as exhibits with equivalent exhibit numbers to our Quarterly Report on Form 10-Q for our fiscal quarter ended March 31, 2021, filed with the Commission on May 24, 2021, each of which is incorporated herein by reference thereto.
> - Filed as exhibits with equivalent exhibit numbers to our Current Report on Form 8-K, filed with the Commission on September 7, 2022, each of which is incorporated herein by reference thereto.
<- Filed as exhibits 10.27, 10.28, 10.29, and 10.30, respectively, to our Post-Effective Amendment No. 1 to our Registration Statement on Form 10, filed with the Commission on July 1, 2021, each of which is incorporated herein by reference thereto.
@- Filed as exhibits with equivalent exhibit numbers to our amended Annual Report on Form 10-K for our fiscal year ended September 30, 2022, filed with the Commission on August 7, 2023, each of which is incorporated herein by reference thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENDEXX Corporation
| August 28, 2023 | By: | /s/ Todd Davis |
| Todd Davis | ||
| Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/ Todd Davis | Dated: August 28, 2023 | |
| Todd Davis | ||
| President, Chief Executive Officer, | ||
| Secretary and Chairman and Director | ||
| /s/ Steven M Plumb | Dated: August 28, 2023 | |
| Steven M Plumb | ||
| Chief Financial Officer | ||
| /s/ Nick Mehdi | Dated: August 28, 2023 | |
Nick Mehdi |
||
| Director | ||
| /s/ Irving Minnaker | Dated: August 28, 2023 | |
Irving Minnaker |
||
| Director | ||
| /s/ Dustin Sullivan | Dated: August 28, 2023 | |
Dustin Sullivan |
||
| Director |
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