Nature of Business and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation

The consolidated financial statements of the Company include the accounts of ETI, IP Resources International, Inc., Aviva Companies Corporation, WeHealAnimals, Inc. and SofPulse, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

Going Concern

Going Concern

These accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for a period following the date of these consolidated financial statements. The Company has accumulated losses of $75.1 million, negative cash flows from operations of approximately $0.7 million and $33.4 million of working capital deficit. The Company has raised approximately $0.6 million in debt and equity financing for the year ended December 31, 2022. The Company is raising additional capital through debt and/or equity securities in order to continue the funding of its operations. However, there is no assurance that the Company can raise enough funds or generate sufficient revenues to pay its obligations as they become due, which raises substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying value of assets or liabilities as a result of this uncertainty. To reduce the risk of not being able to continue as a going concern, management has implemented its business plan to materialize revenues from potential future license and distribution agreements, has raised capital through the issuance of promissory notes and has engaged a broker/dealer to raise additional capital.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Critical estimates include the value of shares issued for services and in connection with notes payable agreements, the valuation of the derivative liability, and the valuation of deferred income tax assets. Management uses its historical records and knowledge of its business in making these estimates. Actual results could differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents. Cash is deposited with what we believe are highly credited, quality institutions. The deposited cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. At December 31, 2022 and 2021, the Company does not hold any cash in excess of FDIC limits and does not have any cash equivalents.

Accounts Receivable

Accounts Receivable

The Company uses the specific identification method for recording the provision for doubtful accounts, which was $0 at December 31, 2022 and 2021. Account receivables are written off when all collection attempts have failed.

Impairment of Long-lived Assets

Impairment of Long-lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. If impairment is indicated, the asset is written down to its estimated fair value. The Company did not recognize any impairment loss during the years ended December 31, 2022 and 2021.

Equity-Based Compensation

Equity-Based Compensation

The Company measures equity-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense, net of forfeitures which are recognized as they occur, over the vesting or service period, as applicable, of the stock award using the straight-line method.

Income Taxes

Income Taxes

The Company records a tax provision for the anticipated tax consequences of its reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and income tax credit carry-forward. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.

The Company has adopted ASC Topic 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. The Company has determined that the adoption did not result in the recognition of any liability for unrecognized tax benefits and that there are no unrecognized tax benefits that would, if recognized, affect the Company’s effective tax rate.

Net Loss per Share

Net Loss per Share

Basic net loss per share is calculated based on the net loss attributable to common shareholders divided by the weighted average number of shares outstanding for the period excluding any dilutive effects of options, warrants, unvested share awards and convertible securities. Diluted net loss per common share assumes the conversion of all dilutive securities using the if-converted method and assumes the exercise or vesting of other dilutive securities, such as options, common shares issuable under convertible debt, warrants and restricted stock using the treasury stock method when dilutive.

The Company has 3,012,410 stock options, of which 262,410 are exercisable and 2,000 warrants convertible into an equivalent number of common stock as of December 31, 2022. The Company has 513,730 stock options, of which 513,730 are exercisable and 22,200 warrants convertible into an equivalent number of common stock as of December 31, 2021.

As of December 31, 2022 and 2021, the Company has variable rate convertible notes in an aggregate amount of $7,039,832 and $6,442,035, respectively, including principal and accrued interest, which are convertible into 1,355,310,243 and 632,789,106, respectively, shares of common stock. Such shares are not included in the calculation of the diluted net loss per share as they would have an antidilutive effect.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

The Company’s balance sheet contains derivative liability that is recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value is as follows:

Level 1: uses quoted market prices in active markets for identical assets or liabilities.

Level 2: uses observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: uses unobservable inputs that are not corroborated by market data.

The fair value of the Company’s recorded derivative liability is determined based on unobservable inputs that are not corroborated by market data, which require a Level 3 classification. A Black-Sholes option valuation model was used to determine the fair value. The Company records derivative liability on the consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operation.

The following table presents balances of the liabilities with significant unobservable inputs (Level 3) as of December 31, 2022 and 2021:

	Fair Value Measurements at December 31, 2022 Using
	Quoted Prices in Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total

Derivative liability	$	-	$	-	$	17,359,064	$	17,359,064
Total	$	-	$	-	$	17,359,064	$	17,359,064

	Fair Value Measurements at December 31, 2021 Using
	Quoted Prices in Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total

Derivative liability	$	-	$	-	$	3,442,297	$	3,442,297
Total	$	-	$	-	$	3,442,297	$	3,442,297

The following table presents changes of the liabilities with significant unobservable inputs (Level 3) for the years ended December 31, 2022 and 2021:

	Derivative
	Liability
Balance December 31, 2020	$	4,202,597

Settlement by debt extinguishment		(133,386	)
Settlement by debt conversion		(585,857	)
Change in estimated fair value		(41,057	)

Balance December 31, 2021	$	3,442,297

Settlement by debt Extinguishment		(109,779	)
Change in estimated fair value		14,026,546

Balance December 31, 2022	$	17,359,064

Derivative Liability

Derivative Liability

As of December 31, 2022 and 2021, the Company has variable rate convertible promissory notes, which contained variable conversion rates based on unknown future prices of the Company’s common stock. This resulted in the recognition of a derivative liability as the conversion feature failed the scope exception for derivative accounting due to the variability of its conversion price. The Company measures the derivative liability using the Black-Scholes option valuation model using the following assumptions:

	For Years Ending December 31,
	2022	2021

Expected term	0-1 month	1 -4 months
Exercise price	$0.004-$0.015	$0.01-$0.03
Expected volatility	153%-169%	177%-206%
Expected dividends	None	None
Risk-free interest rate	1.63%-4.73%	0.06%-0.39%
Forfeitures	None	None

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, managements’ assessment, or significant fluctuations in the volatility of the trading market for the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

The Company computes the fair value of the derivative liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the derivative liability is the Company’s stock price, which is subject to significant fluctuation and is not under its control, and the assessment of volatility. The resulting effect on net loss is therefore subject to significant fluctuation and will continue to be so until the Company’s Variable Debentures, which the convertible feature is associated with, are converted into common stock or paid in full with cash. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.

Recent Accounting Standard Updates

Recent Accounting Standard Updates

The Company has evaluated all the recent accounting pronouncements and determined that there are no accounting pronouncements that will have a material effect on the Company’s financial statements.

ENDONOVO THERAPEUTICS, INC. 10-K