Enzolytics Inc (ENZC)

[foxi]

Here's a continuation of my earlier posts digging through the new filings. Specifically, here I'm trying to track what happened to the derivative liabilities (convertible notes) that ENZC continued to disclose as liabilities as late as the Q3 2021 accounting period.


I'm currently focusing on these documents:

"Document A": Annual Report - FINANCIAL AND FOOTNOTES 12.31.2021 published 04/18/2022 for period end date 12/31/2021

"Document B": Annual Report - AMENDED FINANCIALS AND FOOTNOTES DECEMBER31, 2020 published 04/14/2022 for period end date 12/31/2020

"Document C": Quarterly Report - FINANCIALS AND FOOTNOTES published 11/22/2021 for period end date 09/30/2021

"Document D": Annual Report - Annual Disclosure Filing 12.31.2021 published 03/31/2022 for period end date 12/31/2021


From Document D, we know that due to accounting for Bioclonetics as a business combination and not a reverse merger, "The Changes in Accounting Method will result in amendments to the quarters ending March 31. 2021, June 30, 2021 and September 30, 2021 immediately upon completion of the audits." So we know that in the documents above, Document C (the Q3 2021 Quarterly Report) will have future amendments.



Derivative liabilities:

These represent liabilities where "there is no floor to the number of common stock shares the Company might be required to issue", I think since the unpaid debt grows with interest. In Document C, ENZC accounted for $8,795,075 in "derivative liabilities" through December 31, 2020 and this number remained unchanged through September 30, 2021.

As of December 31, 2020 these have conversion prices ranging from .0001 to .0034 meaning the holders of these convertible notes can acquire common stock at those prices regardless of current market price, if they convert. Looking at outstanding shares since 2020, NONE of these notes have been converted before Q3 2021 since there has been no change in derivative liabilities balance and no change in O/S thru that period.

See here and here for more info.



Interestingly, the entire derivative liabilities category drops off the books in Document A. What happened?

From Page 9 of Document A:

All other convertible instruments, the Company evaluates embedded conversion features within convertible debt under ASC Topic 815, Derivatives and Hedging (“ASC 815”) to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”). As of December 31, 2020 and 2019, there were no conversion features that met the definition of a derivative.

Under the ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for convertible debt instruments is that the equity component is required to be included in the additional paid-in capital in the consolidated balance sheets and the value of the equity component is treated as a debt discount which is then amortized over the term of the related debt to its earliest date of redemption.

Which looks to mean that they changed how they're bucketing these expenses after Q3 2021. There are no business operations disclosed after Q3 2021 in Document D that suggest ENZC has discharged any of this convertible debt.

I would expect to see the balances of Document A "Additional paid-in capital" reflect the recategorization, but the numbers in Document A are dramatically different compared to Document C for the "December 31, 2020" columns. I defer to the numbers for "Additional paid-in capital" in Document A as being more accurate than the numbers from Document C, since the latter includes the "(Unaudited)" disclaimer and the former doesn't (btw is it safe to assume Document A is Audited?)

Thus some or all of the $8,795,075 in derivative liabilities from Document C got rolled into the $22,697,485 in Additional paid-in capital in Document A, and it's unclear if $8,795,075 will be the accurate total - but either way ENZC seems to have carried substantial convertible debt forward from 2020 that remains unpaid in 2021/2022.


Assertions so far:

- ENZC appears NOT to have discharged any part of its debt previously accounted as "derivative liabilities"

- The way ENZC is accounting for this debt seems to have changed, rolling whatever total into "Additional paid-in capital"

- $8,795,075 may or may not be the amended total for this category of debt. (We may never get the amended total since the accounting seems to have changed.)

- Old convertible instruments with a highly favorable conversion rate may still exist and contribute to future dilution (whenever the O/S isn't so maxed out)

- This may be our last glimpse of the old convertible notes in ENZC's filings before these are obfuscated into more generalized accounting categories. The consequence of this may be that future filings may show large issuances of Common shares for the reason of "Debt Conversion" like the Livingston ones in 2020, unanticipated by investors who weren't paying attention to how this was all accounted.



Please let me know if you see something I missed! & poke at these assertions. :)