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: common shares as of August 12, 2022
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 | 10 |
| Item 4: | Controls and Procedures | 10 |
| PART II – OTHER INFORMATION | ||
| Item 1: | Legal Proceedings | 11 |
| 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 Form 10-Q 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 June 30, 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)
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| 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 $ | ||||||||
| Prepaid expenses | ||||||||
| Intangible - website domains | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Customer deposit | ||||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Payroll and taxes payable, including related party | ||||||||
| Notes payable, net of discount
of $ | ||||||||
| Convertible notes payable,
net of discount of $ | ||||||||
| Derivative liabilities | ||||||||
| Total current liabilities | ||||||||
| Notes payable, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock, $ Par Value, share authorized | ||||||||
| Series A preferred stock, issued and outstanding, respectively | ||||||||
| Series Z preferred stock, issued and outstanding, respectively | ||||||||
| Common stock, $ Par Value, shares authorized, and issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-1 |
ENDEXX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended | For the nine months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| 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 liabilities | ( | ) | ( | ) | ||||||||||||
| Financing costs and discount amortization | ||||||||||||||||
| Interest expenses | ||||||||||||||||
| Default penalty | ||||||||||||||||
| Gain from settlement of derivative liabilities | ( | ) | ||||||||||||||
| Gain on settlement of liabilities | ( | ) | ||||||||||||||
| Gain on disposition of assets | ( | ) | ( | ) | ||||||||||||
| Total other (income) expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding - basic | ||||||||||||||||
The accompanying notes are an integral part of these unaudited 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 Paid-in | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued for private placements | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for debt settlement | - | - | ||||||||||||||||||||||||||||||||||
| Settlement of derivative liability | - | - | - | |||||||||||||||||||||||||||||||||
| Shares issued for settlement of preferred stock | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued for private placements | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for financing | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balances at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for financing | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balances at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued for private placements | - | - | - | |||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for financing | - | - | ||||||||||||||||||||||||||||||||||
| Warrants issued for financing | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for financing | - | - | ||||||||||||||||||||||||||||||||||
| Warrants issued for financing | - | - | - | |||||||||||||||||||||||||||||||||
| Shares issued for conversion of interest | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for default penalty | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
ENDEXX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the nine months ended | ||||||||
| June 30, | ||||||||
| 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 liabilities | ( | ) | ||||||
| Gain from settlement of liabilities | ( | ) | ||||||
| Gain from settlement of derivative liabilities | ( | ) | ||||||
| Gain on disposition of assets | ( | ) | ||||||
| Impairment expense | ||||||||
| Financing costs | ||||||||
| Default penalty | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ||||||||
| Customer deposit | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Accrued interest, related party | ||||||||
| Payroll and taxes payable, primarily related party | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Proceeds from sale of investments in marketable securities | ||||||||
| Net cash provided by investing activities | ||||||||
| Financing activities: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Proceeds from notes payable | ||||||||
| Repayment of note 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: | ||||||||
| Convertible notes and interest converted to common stock | $ | $ | ||||||
| Derivative liabilities settled through conversion of convertible notes | $ | $ | ||||||
| Debt discount at origination | $ | $ | ||||||
| Prepaid expenses from note payable | $ | $ | ||||||
| Accrued interest settled through note payable | $ | $ | ||||||
| Property and equipment, net, sold for settlement of convertible note and interest payable | $ | $ | ||||||
| Convertible notes and interest payable settled through the sale of property and equipment | $ | $ | ||||||
| Amortization of right-of-use asset and lease liability | $ | $ | ||||||
| Notes and interest payable settled through issuance of convertible notes | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited 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 for personal use and pets. The Company has the following wholly owned subsidiaries:
| ● | Global Solaris Group, LLC |
| ● | Greenleaf Consulting LLC |
| ● | Cann Can LLC |
| ● | Together One Step Closer, LLC |
| ● | PhytoLabs LLC |
| ● | Go Green Global Enterprises, Inc. |
| ● | CBD Health Solutions |
| ● | Kush, Inc. |
| ● | CBD Life Brands, Inc. |
| ● | Retail Pro Associates |
| ● | CBD Unlimited, Inc. |
| ● | Dispense Labs LLC |
| ● | Khode, LLC (70% owner) |
Basis of Presentation and Going Concern
The Company prepares its condensed 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 condensed consolidated financial statements of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
| F-5 |
Our condensed 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 June 30, 2022, we have a working capital deficit of $
2. Summary of Significant Accounting Policies
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 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.
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 June 30, 2022 and September 30, 2021.
The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation.
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.
At
June 30, 2022 and September 30, 2021, we recorded $
| F-6 |
Inventory
Inventory is composed of finished goods, in-process, and raw goods inventory, valued on a first in first out basis, 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 services to be prepaid expenses. As of June 30, 2022, and September 30, 2021, the Company
had $
During
March 2020, the Company entered into a barter agreement whereby it delivered $
The Company assesses the recoverability of barter credits periodically. Factors considered in evaluating the recoverability include management’s plans with respect to advertising for which barter credits can be used. Any impairment losses are charged to operations as they are determinable. During the period ended June 30, 2022, the Company recorded no impairment losses related to barter credits and no barter credits were used.
Investment in Marketable Securities
During fiscal year ended September 30, 2018, the Company invested in marketable securities consisting of publicly traded stocks. These investments are recorded at fair value based on quoted prices at the end of the Company’s reporting period. Any realized or unrealized gains or losses are recognized in the accompanying statements of operations.
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 |
Recoverability of Long-Lived Assets
The Company reviews its long-lived assets on a periodic basis, whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
| F-7 |
We
amortize the cost of other intangible assets over their estimated useful lives, which range up to ten years, unless such lives are deemed
indefinite. During the period ended June 30, 2022, we recorded
Customer Deposits
From time-to-time the Company receives payment from wholesale 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 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 or delivery 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 type:
| For the three months ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Wholesale | $ | $ | ||||||
| Retail | ||||||||
| $ | $ | |||||||
| For the nine months ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Wholesale | $ | $ | ||||||
| Retail | ||||||||
| $ | $ | |||||||
Fair Value of 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 period ended June 30, 2022, except as disclosed.
| F-8 |
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.
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 June 30, 2022 and September 30, 2021:
| June 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Derivative liabilities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| September 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Derivative liabilities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
A reconciliation of the changes in the Company’s Level 3 derivative liabilities at fair value is as follows:
| Balance at September 30, 2021 | $ | |||
| Change in fair value | ||||
| Balance at June 30, 2022 | $ |
From time to time, the Company enters into convertible promissory note agreements (Note 5). These notes are convertible at a fraction of the stock closing price near the conversion date. Additionally, the conversion price, as well as other terms including interest rates, adjust if any future financings have more favorable terms. The conversion features of these notes meet the definition of a derivative which therefore requires bifurcation and are accounted for as a derivative liability.
At
September 30, 2021, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory
notes 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 $
| F-9 |
At
June 30, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory notes
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 $
Convertible Instruments
The Company evaluates and account 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 $
| F-10 |
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 September 30, 2021, 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.
The Company accounts for share-based compensation in accordance with the fair value recognition provisions of the FASB ASC No. 718 and No. 505. The Company issues restricted stock to employees for their services. Cost for these transactions are measured at the fair value of the equity instruments issued at the date of grant. These shares are considered fully vested and the fair market value is recognized as expense in the period granted. The Company also issues restricted stock to consultants for various services. Costs for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment only if there is sufficient disincentive to ensure performance or (ii) the date at which the counterparty’s performance is complete. The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services. For agreements requiring future services, the consulting expense is to be recognized ratably over the requisite service period.
Basic net loss/income per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options, warrants and convertible notes. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented.
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Warrants | ||||||||
| Convertible debt | ||||||||
All
convertible notes payable, by written agreement, provide for a beneficial ownership limitation cap of
Recently Issued Accounting Pronouncements
During the period ended June 30, 2022, there were several new accounting pronouncements issued by the FASB. Each of the other 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 financial statements.
| F-11 |
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements.
If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
3. Inventory
The Company’s inventory consisted of the following at the respective balance sheet dates:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| 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:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Land | $ | $ | ||||||
| Building | ||||||||
| Machinery and equipment | ||||||||
| Computer/office equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
On
April 1, 2022, the Company sold its land and building the Noteholder C. The land and building were carried at cost of $
| F-12 |
5. Debt
Notes payable
The Company’s notes payable as of June 30, 2022, are summarized as follows:
| Balances – June 30, 2022 | ||||||||||||||||||||
| Noteholder | Origination | Maturity | Interest | Principal | Discount | |||||||||||||||
| Noteholder A | % | $ | $ | |||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder B | % | |||||||||||||||||||
| Noteholder B | % | |||||||||||||||||||
| Noteholder C | % | |||||||||||||||||||
| Noteholder G | % | |||||||||||||||||||
| Noteholder I | % | |||||||||||||||||||
| Noteholder J | % | |||||||||||||||||||
| Noteholder K | % | |||||||||||||||||||
| Noteholder K | % | |||||||||||||||||||
| $ | $ | |||||||||||||||||||
The Company’s notes payable as of September 30, 2021, are summarized as follows:
| Balances - September 30, 2021 | ||||||||||||||||||||
| Noteholder | Origination | Maturity | Interest | Principal | Discount | |||||||||||||||
| Noteholder A | % | $ | $ | |||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder A | % | |||||||||||||||||||
| Noteholder B | % | |||||||||||||||||||
| Noteholder G | % | |||||||||||||||||||
| Noteholder I | % | |||||||||||||||||||
| Noteholder I | % | |||||||||||||||||||
| Noteholder I | % | |||||||||||||||||||
| Noteholder J | % | |||||||||||||||||||
| Noteholder K | % | |||||||||||||||||||
| $ | $ | |||||||||||||||||||
At
June 30, 2022 and September 30, 2021, accrued interest related to notes payable totaled $
During
October 2021, the $
During
February 2022, the $
| F-13 |
Convertible notes payable
The Company’s convertible notes payable as of June 30, 2022, are summarized as follows:
| Balances – June 30, 2022 | |||||||||||||||||||||||||||
| Noteholder | Origination | Maturity | Interest | Conversion | Principal | Discount | Derivative | ||||||||||||||||||||
| Noteholder A | % | $ | $ | $ | |||||||||||||||||||||||
| Noteholder A | % | ||||||||||||||||||||||||||
| Noteholder A | % | ||||||||||||||||||||||||||
| Noteholder A | % | ||||||||||||||||||||||||||
| Noteholder A | % | $ | |||||||||||||||||||||||||
| Noteholder A | % | $ | |||||||||||||||||||||||||
| Noteholder A | % | $ | |||||||||||||||||||||||||
| Noteholder C | % | $ | |||||||||||||||||||||||||
| Noteholder D | % | $ | |||||||||||||||||||||||||
| Noteholder D | % | $ | |||||||||||||||||||||||||
| Noteholder E | % | $ | |||||||||||||||||||||||||
| Noteholder F | % | $ | |||||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||||||
The Company’s convertible notes payable as of September 30, 2021, are summarized as follows:
| Balances - September 30, 2021 | |||||||||||||||||||||||||||
| Noteholder | Origination | Maturity | Interest | Conversion | Principal | Discount | Derivative | ||||||||||||||||||||
| Noteholder A | % | $ | $ | $ | |||||||||||||||||||||||
| Noteholder A | % | ||||||||||||||||||||||||||
| Noteholder A | % | ||||||||||||||||||||||||||
| Noteholder A | % | ||||||||||||||||||||||||||
| Noteholder A | % | $ | |||||||||||||||||||||||||
| Noteholder A | % | $ | |||||||||||||||||||||||||
| Noteholder A | % | $ | |||||||||||||||||||||||||
| Noteholder C | % | $ | |||||||||||||||||||||||||
| Noteholder E | % | $ | |||||||||||||||||||||||||
| Noteholder F | % | $ | |||||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||||||
At
June 30, 2022 and September 30, 2021, accrued interest related to convertible notes payable totaled $
6. Payroll and Payroll Taxes Payable
The Company’s payroll and payroll taxes payable consisted of the following at the respective balance sheet dates:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Accrued payroll - Officer | $ | $ | ||||||
| Accrued payroll - Employee | ||||||||
| Accrued payroll taxes | ||||||||
| $ | $ | |||||||
| F-14 |
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 Z Preferred Stock shares have voting rights equal to the aggregate of all other voting rights plus 1 and each
share is convertible into shares of the Company’s common stock. Additionally, the Series Z Preferred Stock carries a cumulative
dividend at
Issuances for services
During
October 2021, the Company issued shares of common stock valued at $
During
May 2022, the Company issued shares of common stock valued at $
Issuances for financing costs
During
October 2021, the Company and Noteholder J agreed to modify the terms of the May 2021 note payable agreement. The maturity of the note
was extended from
During
May 2022, the Company and Noteholder J agreed to roll the May 2021 note agreement into a new $
Issuance for default penalty
During
April 2022, the Company’s common stock was no longer quoted on OTC, resulting in a default under the terms of the May 2021 note
agreement with Noteholder F (Note 5). To prevent Noteholder F from triggering default provisions, the Company and Noteholder F agreed
that the Company would issue common shares valued at $
Warrants outstanding
During
the year ended September 30, 2019, the Company issued warrants for the purchase of
During
October 2021, the Company issued warrants for the purchase of
During
December 2021, the Company issued warrants for the purchase of
| F-15 |
During
May 2022, the Company issued warrants for the purchase of
A summary of the status of the Company’s warrant grants as of June 30, 2022, and the changes during the period then ended is presented below:
| Weighted-Average | |||||||||||||
| Weighted-Average | Remaining | ||||||||||||
| Warrants | Exercise Price | Contractual Life | |||||||||||
| Outstanding at September 30, 2021 | $ | years | |||||||||||
| Granted | years | ||||||||||||
| Exercised | - | ||||||||||||
| Expired | - | ||||||||||||
| Outstanding at June 30, 2022 | $ | years | |||||||||||
| Exercisable at June 30, 2022 | $ | years | |||||||||||
8. Commitments and Contingencies
Serious Promotions, Inc.
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 the Company. 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
On
May 7, 2018, we assumed two consulting agreements for the two principals of Go Green Global Enterprises, a Nevada Corporation, when we
acquired them. The consultants provide general business services as needed by the Company, and the term of the contract is for one year
and automatically renews from year to year after that, compensation is set at a monthly fee of $
On
January 11, 2019, we entered into a joint venture agreement with a biometric company (GFE), in conjunction with our Jamaica financial
interest, Go Green Global. GFE will contribute use of its software licenses, payment solutions software, and to assist with capital raises
and build all building required for redevelopment. We agreed to use of our M3Hub and Gorilla Tek Technologies globally and use of our
| F-16 |
On
January 28, 2019,
On
October 1, 2020, the Company entered into an LLC operating agreement for the formation of Khode, LLC. Pursuant to the operating agreement,
the Company owns
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 of $
One
of the Company’s subsidiaries entered into a lease agreement for retail space in Jamaica effective October 2018. The Company records
rent expense associated with this lease on the straight-line basis in conjunction with the terms of the underlying lease. The lease expired
after 36 months in October 2021 and required monthly lease payments of $
9. Related Party Transactions
Todd Davis, CEO and CFO, employment agreement
During
April 2005, the Company entered into an employment agreement with Todd Davis providing for an annual salary of $
Rayne Forecast Inc. consulting agreement
Rayne
Forecast, Inc. (RFI), an entity owned by the CEO, is a party with the Company to a Consulting Agreement, pursuant to which the CEO, through
RFI, provides certain services to the Company in connection with his role as the Company’s CEO and is compensated, through RFI,
for certain services rendered to the Company. Pursuant to the terms of the Consulting Agreement, as amended, the Company shall pay to
the CEO a minimum fee of $
10. Significant Customers
For the three and nine months ended June 30, 2022,
a retail customer was responsible for
At September 30, 2021, the Company had no significant revenue or accounts receivable concentrations.
| F-17 |
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 and nine months ended June 30, 2022, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MDA”) should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K (the “Form 10-K”).
Note about Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 Quarterly Report are not part of this 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.
Overview
We develop hemp-derived, cannabidiol-based products, each formulated to address key segments of the health and wellness market. Through our subsidiaries, we sell 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. In addition to our consumer products, our Gorilla-Tek division offers a state-of the art automated dispensing system providing a secure method of distributing hemp-based products. The proprietary system enables retailers to increase sales channels without opening a physical storefront location. Complementing our retail products and Gorilla-Tek divisions, we also own and operate a number of wholly-owned subsidiaries that offer technology and consulting solutions to the hemp and CBD industry, including an easy to use “Seed-to-Shelf” compliance and inventory tracking and process management system for regulated products in a front of counter pharmacy support platform.
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, and 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.
| 4 |
Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Revenues
Revenues for the three months ended June 30, 2022 were $418,151, as compared to $120,801 for the three months ended June 30, 2021, a $297,350 increase. The increase in revenue is attributable to improved supply-chain, increased consumer spending and improved 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 June 30, 2022 was a profit of $206,792, as compared to a loss of $(264,296) for the three months ended June 30, 2021. This $471,088 increase in gross profit was attributable to increased quarter-over-quarter revenues, lower costs of production and decreases in inventory impairment between the periods.
Operating Expenses
Operating expenses for the three months ended June 30, 2022, were $839,785, as compared to $1,836,602 for the three months ended June 30, 2021, an decrease in operating expenses of $996,817. The decrease in operating expenses over the prior period can be attributed to a significant decrease in advertising and promotional expenses.
We expect that operating expenses will increase over the next 12 months as our long-term growth strategy will require significant increases in personnel and facilities along with 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 expenses for the three months ended June 30, 2022 were $10,578,346, as compared to expenses of $305,546 for the three months ended June 30, 2021, a $10,272,800 increase. This increase in other expenses is mostly attributable to a $9,424,041 increase in the fair value of derivative liabilities, $543,230 in financing costs and discount amortization, $450,287 in interest expenses and $584,738 in default penalties.
Derivative liabilities are a non-cash item that are associated with loans that are convertible and 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 June 30, 2022 was $632,993, as compared to loss from operations of $2,100,898 for the three months ended June 30, 2021, an improvement of $1,467,905. The improvement in loss from operations was the result of an increase in gross revenues, lower costs of revenues and marginal inventory impairment, and a decrease in operating expenses. Total net loss for the three months ended June 30, 2022 was $11,211,339, as compared to a total net loss of $2,406,444 for the three months ended June 30, 2021, an increase of $8,804,895 in total net loss, primarily attributed to an increase of $9,424,041 in the fair value of derivative liability and a gain of $432,950 in from the disposition of assets.
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 2022 only in part due to the COVID-19 pandemic. Nevertheless, we expect that, during our current fiscal year, the adverse impact of COVID-19 on our business will slowly abate, as the positivity rate in tests for COVID-19 continues to decrease along with the new infection and mortality rates and the number of people becoming vaccinated continues to increase.
| 5 |
Nine months ended June 30, 2022 Compared to Nine months ended June 30, 2021
Revenues
Revenues for the nine months ended June 30, 2022 were $947,428, as compared to $416,094 for the nine months ended June 30, 2021, a $531,334 increase. The increase in revenue is attributable to improved supply-chain, increased consumer spending and improved 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 nine months ended June 30, 2022 was a profit of $398,777, as compared to a loss of $(536,846) for the nine months ended June 30, 2021. This $935,623 improvement in gross profit was attributable to increased revenues, lower costs of inventory and significant decreases in production costs and inventory impairment between the periods.
Operating Expenses
Operating expenses for the nine months ended June 30, 2022, were $3,031,662, as compared to $3,394,066 for the nine months ended June 30, 2021, a decrease of $362,404. The decrease in operating expenses over the period can be attributed to decreases in advertising and promotional expenses which were partially offset by increases in professional fees.
We expect that operating expenses will increase over the next 12 months as our long-term growth strategy will require significant increases in personnel and facilities along with 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 expenses for the nine months ended June 30, 2022 were $13,004,753, as compared to other expenses of $979,005 for the nine months ended June 30, 2021, a $12,025,748 increase. This is mostly attributable to $11,044,226 in the change in fair value of derivative liabilities, $1,093,823 in financing costs and amortization, $928,664 in interest expense and $548,738 in default penalties.
Derivative liabilities are associated with loans that are convertible and 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 nine months ended June 30, 2022 was $2,632,885, as compared to loss from operations of $3,930,912 for the nine months ended June 30, 2021, a decrease in net loss from operations of $1,298,027. The improvement in loss from operations was the result of an increase in gross revenues, lower costs of revenues and marginal inventory impairment, and a decrease in operating expenses. Total net loss for the nine months ended June 30, 2022 was $15,637,638, as compared to a total net loss of $4,909,917 for the nine months ended June 30, 2021, an increase of $10,727,721 in total net loss, primarily attributed to an increase of $11,044,226 in the fair value of derivative liability, $1,093,823 in financing costs, and $928,664 in interest expenses.
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 2022 only in part due to the COVID-19 pandemic. Nevertheless, we expect that, during our current fiscal year, the adverse impact of COVID-19 on our business will slowly abate, as the positivity rate in tests for COVID-19 continues to decrease along with the new infection and mortality rates and the number of people becoming vaccinated continues to increase.
| 6 |
Liquidity and Capital Resources
Going Concern
We have incurred operating losses since inception and have negative cash flow from operations. As of June 30, 2022, we had a stockholders’ deficit of $23,408,547, a working capital deficit of $23,550,090, an accumulated deficit of $55,151,482 and incurred a net loss of $11,211,339 in the three months ended June 30, 2022. Additionally, we utilized $1,227,283 in cash for operations and utilized $9,500 in cash for investing activities during the nine months ended June 30, 2022, while we received $1,203,467 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 June 30, 2022, we had a cash position of $6,560. 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 nine months ended June 30, 2022, our cash used in operating activities amounted to an outflow of $1,227,283, compared to cash used during the nine months ended June 30, 2021 of $3,144,075. The $1,916,792 decrease in cash used in our operating activities is due to changes in the fair value of derivative liabilities, decreases in inventory impairment and loss from settlement liabilities.
Cash Flow – Financing Activities
For the nine months ended June 30, 2022, our cash provided by financing activities amounted to $1,203,476, which includes $0 in proceeds received from the sale of our Common Stock, $999,853 in proceeds from the issuance of convertible notes, and $203,623 in proceeds from the issuance of notes payable.
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For the nine months ended June 30, 2021, our cash provided by financing activities amounted to $3,161,484, which includes $228,000 in proceeds received from the sale of our Common Stock, $1,614,234 in proceeds from the issuance of convertible notes, and $1,340,000 in proceeds from the issuance of notes payable.
Cash Flow – Investing Activities
Net cash used in investing activities in the nine months ended June 30, 2022 and 2021 was $9,500 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 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. As of June 30, 2022, we had approximately $924,468 of product in inventory, which was an increase of approximately $3,656, compared to approximately $920,812 at September 30, 2021. 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 September 30 as the date to perform the annual impairment test.
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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 September 30 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 nine months ended June 30, 2022 and 2021, we recognized stock-based compensation expense of approximately $455,800, and $143,193, respectively.
Off Balance Sheet Arrangements
As of June 30, 2022 and on June 30, 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.
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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 June 30, 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 June 30, 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.
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 shares of our Common Stock in the three months ended June 30, 2022:
We had issuances for Jefferson Street and Apollo Management SPV LLC.
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 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 Annual Report on Form 10-K for our fiscal year ended September 30, 2021, filed with the Commission on March 31, 2022, each of which is incorporated herein by reference thereto.
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SIGNATURES
Pursuant to the requirements 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 15, 2022 | By: | /s/ Todd Davis |
| Todd Davis | ||
| Chief Executive Officer, Chief Financial Officer | ||
| (Principal Executive Officer) | ||
| (Principal Financial Officer) |
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