Notes
to Condensed Consolidated Financial Statements
Note
1 - Organization and Nature of Business
Endonovo
Therapeutics, Inc. and Subsidiaries (the “Company” or “ETI”) is primarily focused in the business of biomedical
research and development, particularly in regenerative medicine, which has included the development of its proprietary square
wave form device. The Company has historically been involved with intellectual property licensing and commercialization.
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited interim condensed consolidated financial statements have been presented in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions
to Article 8 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required
by GAAP for complete financial statements. The condensed consolidated financial statements as of June 30, 2016 and 2015 are unaudited;
however, in the opinion of management such interim condensed consolidated financial statements reflect all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results
of operations for the period presented are not necessarily indicative of the results that might be expected for future interim
periods or for the full year.
The
consolidated financial statements of the Company include the accounts of ETI and IPR as of March 14, 2012; Aviva as of April 2,
2013; and WeHealAnimals as of November 16, 2013. All significant intercompany accounts and transactions are eliminated in consolidation.
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 raised approximately $1.3 million in debt and equity financing
for the period January 1, 2016 to June 30, 2016. The Company is raising additional capital through debt and 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 initiated a private placement offering to
raise capital through the sale of its common stock and is seeking out profitable companies. Although, uncertainty exists as to
whether the Company will be able to generate enough cash from operations to fund the Company’s working capital needs or
raise sufficient capital to meet the Company’s obligations as they become due, no adjustments have been made to the carrying
value of assets or liabilities as a result of this uncertainty.
Net
Income (Loss) per Share
For
the six month period ending June 30, 2016, the Company had 7,536,612 of weighted average common shares relating to the convertible
debt, under the if-converted method, however, these shares are not dilutive because the Company recorded a loss during the six
month period ended June 30, 2016. For the six months ended June 30, 2015, the Company had no dilutive securities.
Recent
Accounting Standard Updates
The
Company is not aware of any recently issued accounting pronouncements that when adopted will have a material effect on the Company’s
financial position or results of its operations.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
2 – Property, Plant and Equipment
The
following is a summary of equipment, at cost, less accumulated depreciation at June 30, 2016 and December 31, 2015:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Autos
|
|
$
|
64,458
|
|
|
$
|
64,458
|
|
Medical equipment
|
|
|
5,000
|
|
|
|
5,000
|
|
Other equipment
|
|
|
8,774
|
|
|
|
8,774
|
|
|
|
|
78,232
|
|
|
|
78,232
|
|
Less accumulated depreciation
|
|
|
54,492
|
|
|
|
46,575
|
|
|
|
$
|
23,740
|
|
|
$
|
31,657
|
|
Note
3 - Notes Payable and Long Term Loan
Notes
Payable
During
the six months ended June 30, 2016, the Company issued two Convertible Notes (“Variable Notes”) with original terms
of one year and nine months, and one year, respectively, and with interest rates ranging from an add-on interest equal to 10%
of the initial principal, and 10%, respectively, and, a variable conversion rate with a discount of 30% of the Company’s
common stock based on the terms included in the Variable Notes. The Variable Notes contains a prepayment option which enables
the Company to prepay the note for a period of 0-180 days, and six months , respectively, subsequent to issuance at a premium
of 125%. In addition, 300,000 two-year warrants at $0.81 were issued with and to the holder of one of the Variable Notes. The
gross amount of these Variable Notes outstanding is $505,000 as of June 30, 2016.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Notes payable at beginning of period
|
|
$
|
2,333,751
|
|
|
$
|
1,377,416
|
|
Notes payable issued
|
|
|
605,000
|
|
|
|
1,586,250
|
|
Repayments of notes payable in cash
|
|
|
(188,200
|
)
|
|
|
(138,000
|
)
|
Less amounts converted to equity
|
|
|
(465,750
|
)
|
|
|
(491,915
|
)
|
Notes payable at end of period
|
|
|
2,284,801
|
|
|
|
2,333,751
|
|
Less debt discount
|
|
|
(663,929
|
)
|
|
|
(799,307
|
)
|
|
|
$
|
1,620,872
|
|
|
$
|
1,534,444
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued to related parties
|
|
$
|
181,800
|
|
|
$
|
245,000
|
|
Notes payable issued to non-related parties
|
|
$
|
1,439,072
|
|
|
$
|
1,289,444
|
|
The
maturity dates on the notes payable are as follows:
|
|
|
Notes to
|
|
|
|
|
12 months ending,
|
|
|
Related parties
|
|
|
Non-related parties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
$
|
181,800
|
|
|
$
|
1,470,501
|
|
|
$
|
1,652,301
|
|
June 30, 2018
|
|
|
$
|
-
|
|
|
$
|
632,500
|
|
|
$
|
632,500
|
|
June
30, 2019
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
181,800
|
|
|
$
|
2,103,001
|
|
|
$
|
2,284,801
|
|
Derivative
Liability
The
Company has issued Variable Debentures which contained variable conversion rates based on unknown future prices of the Company’s
common stock. This results in a conversion feature. The Company measures the conversion feature using the Black-Scholes option
valuation model using the following assumptions:
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
9
months - 3 years
|
|
|
|
9
months - 1 year
|
|
|
|
9
months - 3 years
|
|
|
|
9
months - 1 year
|
|
Exercise price
|
|
|
$0.0659-$0.28
|
|
|
|
$0.30-$0.52
|
|
|
|
$0.0659-$0.28
|
|
|
|
$0.30-$0.52
|
|
Expected volatility
|
|
|
221%-276%
|
|
|
|
158%-181%
|
|
|
|
199%-276%
|
|
|
|
158%-181%
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Risk-free
interest rate
|
|
|
0.45%
to 1.06%
|
|
|
|
0.28%
|
|
|
|
0.45%
to 1.06%
|
|
|
|
0.28%
|
|
Forfeitures
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
The
time period over which the Company will be required to evaluate the fair value of the conversion feature is nine to twenty-four
months or conversion.
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. 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.
As
of June 30, 2016 and December 31, 2015, the balances of the Derivative Liability are as follows:
|
|
Derivative
|
|
|
|
Liability
|
|
Balance December 31, 2015
|
|
$
|
3,973,542
|
|
|
|
|
|
|
Issuance of convertible debt
|
|
|
903,587
|
|
Settlements by debt extinguishment
|
|
|
(1,107,898
|
)
|
Change in estimated fair value
|
|
|
(2,598,684
|
)
|
|
|
|
|
|
Balance June 30, 2016
|
|
$
|
1,170,547
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Long
Term Loan
The
Company has financed the purchase of an automobile. The maturity dates on the loan are as follows:
Maturity
dates of long term debt
Twelve months ending,
|
|
|
|
|
June 30, 2017
|
|
$
|
12,212
|
|
June 30, 2018
|
|
$
|
10,465
|
|
|
|
$
|
22,677
|
|
|
|
|
|
|
Current portion
|
|
$
|
12,212
|
|
Long term portion
|
|
$
|
10,465
|
|
Note
4 - Shareholders’ Deficit
Common
Stock
The
Company has entered into consulting agreements with various consultants for service to be provided to the Company. The agreements
stipulate a monthly fee and a certain number of shares that the consultant vests in over the term of the contract. The consultant
is issued a prorated number of shares of common stock at the beginning of the contract, which the consultant earns over a three-month
period. At the anniversary of each quarter, the consultant is issued a new allotment of common stock during the first 3 years
of engagement. In accordance with ASC 505-50 – Equity-Based Payment to Non-Employees, the common stock shares issued to
the consultant are valued upon their vesting, with interim estimates of value as appropriate during the vesting period. During
the six months ended June 30, 2016, the Company issued 1,500,000 shares of common stock with a value of $759,800 related to these
consulting agreements.
During
the six months ended June 30, 2016, the Company issued pursuant to a private placement offering 3,756,274 shares of common stock
and the same number of warrants for cash of $711,250 and conversion of notes and accrued interest in the amount of $284,367. The
Company also issued 566,327 shares of common stock for cash of $107,079 and 3,681,492 shares of common stock for the conversion
of notes and accrued interest in the amount of $1,501,254.
Also,
during the six months ended June 30, 2016, the Company issued 259,917 shares of common stock valued at $110,775 related to the
extension of outstanding notes and lock-up agreements. The Company also issued 3,333,246 shares of common stock with a value of
$868,054 for services provided to the Company.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Series
AA Preferred Shares
On
February 22, 2013, the Board of Directors of the Company authorized an amendment to the Company’s Articles of Incorporation,
as amended (the “Articles of Incorporation”), in the form of a Certificate of Designation that authorized the issuance
of up to one million (1,000,000) shares of a new series of preferred stock, par value $0.0001 per share, designated “Series
AA Super Voting Preferred Stock,” for which the board of directors established the rights, preferences and limitations thereof.
Each
holder of outstanding shares of Series AA Super Voting Preferred Stock shall be entitled to one hundred thousand (100,000) votes
for each share of Series AA Super Voting Preferred Stock held on the record date for the determination of stockholders entitled
to vote at each meeting of stockholders of the Company. As of June 30, 2016, there were 1,000 shares of Series AA Preferred stock
outstanding.
Warrants
During
the six months ended June 30, 2016, in conjunction with the sale of common stock and issuance of notes, the Company issued two
and five-year common stock purchase warrants to acquire up to 4,056,274 shares of common stock. These warrants have exercise prices
ranging from $0.195 to $0.81 per share. The balance of all warrants outstanding as of June 30, 2016 is as follows:
|
|
|
Outstanding Warrants
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
|
Shares
|
|
|
Per Share
|
|
Outstanding at January
1, 2016
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
|
4,056,274
|
|
|
$
|
0.55
|
|
Cancelled
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
at June 30, 2016
|
|
|
|
4,056,274
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2016
|
|
|
|
4,056,274
|
|
|
$
|
0.55
|
|
Note
5 – Related Party Transactions
Two
officers and executives of the Company have entered into note payable agreements with the Company. $63,200 of principal has been
repaid during the six months ended June 30, 2016. The balance of notes payable from related parties at June 30, 2016 is $181,800.
Note
6 – Fair Value Measurements
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 and warrant liabilities that are 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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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-Scholes Option Valuation Model was used to determine the fair
value. The Company records derivative liability on the condensed consolidated balance sheets at fair value with changes in fair
value recorded in the condensed consolidated statements of operation.
The
following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the six months ended June
30, 2016:
|
|
Fair Value Measurements Using
|
|
|
Quoted Prices in
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
1,170,547
|
|
|
$
|
1,170,547
|
|
Total
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
1,170,547
|
|
|
$
|
1,170,547
|
|
Note
7 – Subsequent Events
Subsequent
to June 30, 2016, an aggregate of 2,000,000 shares of restricted common stock were issued for services.
Subsequent
to June 30, 2016, the Company issued 780,916 shares of its restricted common stock and 780,916 Warrants pursuant to a Private
Placement Memorandum and private offerings.
Subsequent
to June 30, 2016, the Company issued 2,263,514 commitment shares of its restricted common stock to Bellridge Capital, LLP pursuant
to the terms of the executed
Note Securities Purchase Agreement and Equity Line Securities
Purchase Agreement.
As
a result of these issuances the total number of shares outstanding is 122,945,087.
Subsequent
to June 30, 2016, the following transactions occurred:
On
July 9, 2016, the Company signed a binding letter agreement (“Letter Agreement”), dated July 8, 2016 for our acquisition
of all of the outstanding shares of
Rio Grande
Neurosciences, Inc. (RGN) from its existing shareholders. The Letter Agreement calls for a purchase price of $30,000,000 for all
of the shares of RGN, of which we have paid $500,000 through the delivery of a promissory note (the “Note”) which
is due on the earlier of January 8, 2017 or the closing of the acquisition of RGN and bears interest at 7.5%. The balance of the
purchase price will be paid as Pursuant to the Letter Agreement, Endonovo will be acquiring RGN for an aggregate purchase price
of $30,000,000, consisting of the Note, $1.0 million in cash, approximately $15 million in Endonovo common stock, the assumption
by us of $8.5 million in senior secured notes and approximately $5 million in Endonovo common stock warrants. Endonovo will also
be committed to paying RGN’s shareholders a 10% royalty on the sale of RGN commercialized products. The Letter Agreement
has been approved by the boards of directors of both the Company and RGN and is binding, but subject to the execution of a definitive
purchase agreement, shareholder approvals and Endonovo raising additional capital. The parties expect to sign a definitive agreement
within the third quarter ending September 30, 2016 and close at the same time or shortly thereafter. The Letter Agreement contemplates
a Board of Directors comprised of three designees from RGN and four from us.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
The
foregoing is only a brief summary of the Letter Agreement and the Note and the reader is referred to the Letter agreement and
the Note, which are exhibits to our current report on Form 8-K dated July 9, 2016, for a full understanding of their terms and
conditions of those documents.
On
July 12, 2016, the Company entered into several agreements with Bellridge Capital, LP (“BCLP”) relating to two financing
transactions. One transaction is for $1,000,000 of convertible promissory notes and the other is for a $9,000,000 equity line.
The
$1,000,000 note financing involves a Note Securities Purchase Agreement (“NSPA”) and a form of note to be issued by
us on funding. The notes will be purchased at a 5.5% original issue discount, bear interest at 6% per annum, are convertible into
our common stock at a 25% discount to our lowest trading price for the 20 days prior to the conversion. BCLP will not affect any
conversion which will result in its holding more than 4.99% of our common stock and has agreed to limit the sales of our stock
to 22.5% of the trading volume on the date of sale unless the trading volume exceeds $130,000 on a day, in which case the applicable
trading volume limitation will be 30%. The form of note provides for certain penalties for failure to timely deliver stock and
contains other protective provisions for BCLP. $400,000 principal amount of the Note has been funded, the next tranche of $200,000
will be due in 30 days and the final tranche of $400,000, less the commission fee, will be funded upon the effectiveness of a
registration statement that we will file covering the shares of our common stock issuable upon conversion of the notes.
The
$9,000,000 Equity Line is pursuant to an Equity Line Securities Purchase Agreement (“ELSPA”) which provides for a
3% origination fee also required BCLP to purchase shares of our stock which we will put to BCLP at a price equal to 75% of the
lowest bid price for our stock during the 10 trading days preceding the put notice. Our draw downs, or puts, have a minimum amount
of $25,000 and a maximum amount of $500,000 and can be no more than 300% of the average trading volume of our stock during the
ten day pricing period of the put. BCLP is not required to accept any put which will result in their becoming a holder of more
than 4.99% of our outstanding stock and its resales are subject to the same volume limitations as resales of our stock issued
on conversion of the notes. As a result of the restrictions and limitations on our right to put our shares to BCLP, we cannot
give any assurance as to whether we will be able to raise $9,000,000 under the ELSPA. The ELSPA has a term of 36 months or when
BCLP has purchased $9,000,0000 of our stock, whichever is earlier
.
In
connection with the foregoing financing agreements with BPLP, we also signed a Registration Rights Agreement (the “RRA”)
with BCLP which requires us to file a registration statement under the Securities Act of 1933, as amended, at our expense covering
the shares issuable on conversion of the notes and upon our exercise of puts. The funds under the ELSPA will not be available
to us until 30 days after the registration statement is ordered effective.
Aegis
Capital Corp. will receive a 10% commission on all funds raised and warrants to purchase 8% of the aggregate number of shares
sold under the NSPA and the ELSPA bringing the Company’s net proceeds under the NSPA to $900,000.