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 September 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 $2.1 million in debt and equity financing
for the period January 1, 2016 to September 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 nine month period ending September 30, 2016, the Company had 7,861,475 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 this nine
month period.
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 September 30, 2016 and December 31, 2015:
|
|
September 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
|
|
|
58,451
|
|
|
|
46,575
|
|
|
|
$
|
19,781
|
|
|
$
|
31,657
|
|
Depreciation
expense for the nine months ended September 30, 2016 and 2015 was $11,876 and $10,920, respectively. Repairs and maintenance are
charged to expense as incurred while improvements are capitalized. Upon the sale, retirement or disposal of fixed assets, the
accounts are relieved of the cost and the related accumulated depreciation with any gain or loss recorded to the consolidated
statements of operations.
Note
3 - Notes Payable and Long Term Loan
Notes
Payable
During
the nine months ended September 30, 2016, the Company issued, including the two notes discussed below related to the $1,000,000
financing, nine Convertible Notes (“Variable Notes”) with original terms ranging from one year to one year and nine
months with interest rates ranging from an add-on interest equal to 10% of the initial principal to annual interest rates of 6%
or 10%, and a variable conversion rate with a discounts ranging from 25% to 37% of the Company’s common stock based on the
terms included in the Variable Notes. Some of the Variable Notes contain a prepayment option, which enables the Company to prepay
the note for a period of 0-180 days subsequent to issuance at a premium of 125%. In addition, 300,000 warrants were issued with
and to the holder of one of the Variable Notes. The gross amount of Variable Notes outstanding is $1,662,888 as of September 30,
2016.
In
July 2016, the Company entered into a $1,000,000 financing comprising 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.
The holder 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 the holder. The note will be funded in full in
three tranches. As of September 30, 2016, two tranches amounting to $600,000 principal of the NSPA has been funded and the final
tranche will be funded upon the effectiveness of a registration statement covering the shares of our common stock issuable upon
conversion of the notes. The registration statement became effective subsequent to September 30, 2016.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Notes payable at beginning of period
|
|
$
|
2,333,751
|
|
|
$
|
1,377,416
|
|
Notes payable issued
|
|
|
1,304,231
|
|
|
|
1,586,250
|
|
Repayments of notes payable in cash
|
|
|
(231,500
|
)
|
|
|
(138,000
|
)
|
Less amounts converted to equity
|
|
|
(498,258
|
)
|
|
|
(491,915
|
)
|
Notes payable at end of period
|
|
|
2,908,224
|
|
|
|
2,333,751
|
|
Less debt discount
|
|
|
(1,029,762
|
)
|
|
|
(799,307
|
)
|
|
|
$
|
1,878,462
|
|
|
$
|
1,534,444
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued to related parties
|
|
$
|
170,000
|
|
|
$
|
245,000
|
|
Notes payable issued to non-related parties
|
|
$
|
1,708,462
|
|
|
$
|
1,289,444
|
|
The maturity dates on the notes payable are as follows:
|
|
Notes to
|
|
|
|
|
12 months ending,
|
|
Related parties
|
|
|
Non-related parties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
$
|
170,000
|
|
|
$
|
1,376,204
|
|
|
$
|
1,546,204
|
|
September 30, 2018
|
|
$
|
-
|
|
|
$
|
332,258
|
|
|
$
|
332,258
|
|
|
|
$
|
170,000
|
|
|
$
|
1,708,462
|
|
|
$
|
1,878,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current notes payable
|
|
$
|
170,000
|
|
|
$
|
1,376,204
|
|
|
$
|
1,546,204
|
|
Long term notes payable
|
|
$
|
-
|
|
|
$
|
332,258
|
|
|
$
|
332,258
|
|
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 September 30,
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
1 month - 1 year
|
|
|
|
9 months - 3 years
|
|
|
|
1 month - 2.2 years
|
|
|
|
9 months - 3 years
|
|
Exercise price
|
|
|
$0.069-$0.1051
|
|
|
|
$0.03-$0.31
|
|
|
|
$0.0648-$0.28
|
|
|
|
$0.03-$0.52
|
|
Expected volatility
|
|
|
255%-276
|
|
|
|
175%-193%
|
|
|
|
220%-276%
|
|
|
|
138%-193%
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Risk-free interest rate
|
|
|
0.52% to 0.59%
|
|
|
|
0.25% to 0.40%
|
|
|
|
0.45% to 1.06%
|
|
|
|
0.25%-0.40%
|
|
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 September 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
|
|
|
2,015,501
|
|
Settlements by debt extinguishment
|
|
|
(1,168,210
|
)
|
Change in estimated fair value
|
|
|
(2,645,681
|
)
|
|
|
|
|
|
Balance September 30, 2016
|
|
$
|
2,175,152
|
|
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:
Twelve months ending,
|
|
|
|
September 30, 2017
|
|
$
|
12,303
|
|
September 30, 2018
|
|
$
|
7,355
|
|
|
|
$
|
19,658
|
|
|
|
|
|
|
Current portion
|
|
$
|
12,303
|
|
Long term portion
|
|
$
|
7,355
|
|
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 nine months ended September 30, 2016, the Company issued 2,250,000 shares of common stock with a value of $880,800 related
to these consulting agreements.
During
the nine months ended September 30, 2016, the Company also issued 7,096,760 shares of common stock with a value of $1,410,573
for additional services and fees.
During
the nine months ended September 30, 2016, the Company issued pursuant to a private placement offering 5,851,987 shares of common
stock and the same number of warrants for cash of $948,750 and conversion of notes and accrued interest in the amount of $294,367.
The Company also issued 566,327 shares of common stock for cash of $107,079 and 3,934,279 shares of common stock for the conversion
of notes and accrued interest in the amount of $1,540,041.
Also,
during the nine months ended September 30, 2016, the Company issued 264,117 shares of common stock valued at $111,363 related
to the extension of outstanding notes and lock-up agreements.
Equity
Line of Credit
In
July 2016, the Company entered into a $9,000,000 Equity Line pursuant to an Equity Line Securities Purchase Agreement (“ELSPA”)
which provides for a 3% origination fee and requires the investor to purchase shares of our stock which we will put to the investor
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. The investor 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 the investor, 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, commencing thirty days after the effective date of the final Registration Statement, or when BCLP
has purchased $9,000,0000 of our stock, whichever is earlier. The Registration Statement went effective subsequent to September
30, 2016.
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 September 30, 2016, there were 1,000 shares of Series AA Preferred
stock outstanding.
Warrants
During
the nine months ended September 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 6,151,977 shares of common stock. These warrants have exercise
prices ranging from $0.195 to $0.90 per share. The balance of all warrants outstanding as of September 30, 2016 is as follows:
|
|
|
Outstanding Warrants
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
|
|
Shares
|
|
|
|
Per Share
|
|
Outstanding at January 1, 2016
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
|
6,151,977
|
|
|
$
|
0.44
|
|
Cancelled
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at September 30, 2016
|
|
|
|
6,151,977
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
|
6,151,977
|
|
|
$
|
0.44
|
|
Note
5 – Related Party Transactions
Two
officers and executives of the Company have entered into note payable agreements with the Company. $74,000 of principal
has been repaid during the nine months ended September 30, 2016. The balance of notes payable from related parties at September
30, 2016 is $170,000.
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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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.
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 nine months ended September
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 September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
2,175,152
|
|
|
$
|
2,175,152
|
|
Total
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
2,175,152
|
|
|
$
|
2,175,152
|
|
Note
7 – Subsequent Events
Subsequent
to September 30, 2016, an aggregate of 525,000 shares of restricted common stock were issued for services.
Subsequent
to September 30, 2016, the Company issued 1,388,675 shares of its restricted common stock and 1,388,675 Warrants pursuant to a
Private Placement Memorandum and private offerings for $475,000.
Subsequent
to September 30, 2016, an aggregate of 20,000 shares of restricted common stock were issued for Notes Payable.
Subsequent
to September 30, 2016, an aggregate of 549,252 shares of restricted common stock were issued pursuant to Note Conversions of $58,557.
Subsequent
to September 30, 2016, an aggregate of 2,500 shares of restricted common stock were issued pursuant to a leak out agreement.
As
a result of these issuances the total number of shares outstanding is 127,252,298.