Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2016 and 2015
Note
1 - Nature of Business and Summary of Significant Accounting Policies
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 the proprietary square
wave form device. The Company has historically been involved with intellectual property licensing and commercialization and debt
portfolio management..
On
January 22, 2014 Hanover Portfolio Acquisitions, Inc. (the “Company”) received written consents in lieu of a meeting
of stockholders from holders of a majority of the shares of Common Stock representing in excess of 50% of the total issued and
outstanding voting power of the Company approving an amendment to the Company’s Certificate of Incorporation to change the
name of the Company from “Hanover Portfolio Acquisitions, Inc.” to “Endonovo Therapeutics, Inc.” The name
change was affected pursuant to a Certificate of Amendment (the “Certificate of Amendment”), filed with the Secretary
of State of Delaware on January 24, 2014.
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, and WeHealAnimals, Inc. 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 recurring net losses and working capital deficits. The Company
has raised approximately $2.7 million in debt and equity financing for the year ended December 31, 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 implemented its business plan to materialize revenues from potential, future, license agreements, has initiated
a private placement offering to raise capital through the sale of its common stock, has engaged a broker/dealer to raise additional
capital and is seeking out profitable companies.
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, in connection with notes payable agreements,
in connection with note extension agreements, and as repayment for outstanding debt, the useful lives of property and equipment,
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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
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, 2016, cash and cash equivalents did not exceed FDIC limits.
Property
plant and equipment
Property,
plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives
of the assets, which range between five and seven years. Expenditures for repairs and maintenance are expensed as incurred.
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. Each impairment
test is based on a comparison of the undiscounted future cash flows generated from the asset group to the recorded value of the
asset group. If impairment is indicated, the asset is written down to its estimated fair value.
Revenue
Recognition
The
Company recognizes revenue from its technology licensing and commercialization activities in accordance with paragraph 605-10-S99-1
of the FASB Accounting Standards Codification (“ASC”) for revenue recognition. The Company recognizes revenue when
it is realized or realizable and earned.
The
Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence
of an arrangement exists, (ii) the services have been rendered to the customer and accepted by the customer as completed, and
(iii) collectability is reasonably assured.
Stock-Based
Compensation
The
Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense,
net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award using the straight-line method.
When our common stock is thinly traded, we have made estimates of the fair value of the common stock based not only on market
prices but other factors such as financial condition and results of operations.
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 carryforwards. 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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Net
Income (Loss) per Share
Basic
net income (loss) per share is calculated based on the net income (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 income (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, warrants and restricted
stock using the treasury stock method, when dilutive. For the year ended December 31, 2016, the Company had 11,978,455 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 fiscal year.
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 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 years ended December
31, 2016 and 2015:
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
|
|
Fair
Value Measurements at December 31, 2016 Using
|
|
|
Quoted
Prices in
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical
Assets
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
1,927,752
|
|
|
$
|
1,927,752
|
|
Total
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
1,927,752
|
|
|
$
|
1,927,752
|
|
|
|
Fair
Value Measurements at December 31, 2015 Using
|
|
|
Quoted Prices in
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
3,973,542
|
|
|
$
|
3,973,542
|
|
Total
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
3,973,542
|
|
|
$
|
3,973,542
|
|
The
following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the
years ended December 31, 2016 and 2015:
|
|
Derivative
|
|
|
|
Liability
|
|
Balance December 31, 2014
|
|
$
|
-
|
|
|
|
|
|
|
Issuance
of convertible debt
|
|
|
1,922,121
|
|
Settlements by debt
extinguishment
|
|
|
(480,056
|
)
|
Change
in estimated fair value
|
|
|
2,531,477
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
|
3,973,542
|
|
|
|
|
|
|
Issuance of convertible
debt
|
|
|
2,525,515
|
|
Settlements by debt
extinguishment
|
|
|
(1,718,013
|
)
|
Change
in estimated fair value
|
|
|
(2,853,292
|
)
|
|
|
|
|
|
Balance December 31, 2016
|
|
$
|
1,927,752
|
|
Derivative
Liability
The
Company issued Variable Debentures during the years ended December 31, 2016 and 2015, which contained variable conversion rates
based on unknown future prices of the Company’s common stock. This resulted in a derivative liability. The Company measures
the derivative liability using the Black-Scholes option valuation model using the following assumptions:
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
|
|
|
For
Year Ending December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
1 year
- 2 years
|
|
|
|
9 months
- 3 years
|
|
Exercise price
|
|
|
$0.0113-$0.81
|
|
|
|
$0.03-$0.52
|
|
Expected volatility
|
|
|
176%-276%
|
|
|
|
159%-242%
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
Risk-free interest rate
|
|
|
0.45%-1.06%
|
|
|
|
0.25%-1.06%
|
|
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
In
August 2014, the FASB issued FASB ASU2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern. FASB ASU 2014-15 changes to the disclosure of
uncertainties about an entity’s ability to continue as a going concern. These changes require an entity’s management
to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt
is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within
one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then
the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial
doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s
ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial
doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise
substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the
entity’s ability to continue as a going concern. These changes became effective for the Company for the 2016 annual period.
Management has evaluated the impact of the adoption of these changes and has determined there will be no material impact on the
consolidated financial statements. This guidance will need to be applied by management at the end of each annual period and interim
period therein to determine what, if any, impact there will be on the consolidated financial statements in a given reporting period
.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In
April 2015, the FASB issued ASU No 2015-3, Simplifying the Presentation of Debt Issuance Costs. This update changes the presentation
of debt issuance costs in the balance sheet. ASU 2015-03 requires debt issuance costs related to a recognized debt obligation
to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than
being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. In August 2015,
the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements”. This ASU clarified guidance in ASC 2015-03 stating that the SEC staff would not object to a company presenting
debt issuance costs related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there
were any outstanding borrowings at period-end. This update is effective for annual and interim periods beginning after December
15, 2015, which required us to adopt these provisions in the first quarter of 2016. This update was applied on a retrospective
basis, wherein the balance sheet of each period presented was adjusted to reflect the effects of applying the new guidance. The
adoption of this guidance did not have a material impact on our consolidated financial statements.
In
November 2015, the FASB issued ASU No 2015-17, Income Taxes (Topic 740). The amendments in ASU 2015-17 change the requirements
for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income
tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the
presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial position. The pronouncement is effective for fiscal years and interim periods
within those fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning
of an interim or annual reporting period. The Company has early adopted this pronouncement for the fiscal reporting period ended
December 31, 2016, and has reclassified the presentation of deferred income taxes in the prior period to conform with the current
year classification in the consolidated balance sheets. As a result of the Company having recognized a valuation reserve for the
entire deferred tax liability balance at December 31, 2016 and 2015, there is no impact of the presentation of deferred
income taxes in our financial statements.
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update intends to enhance
the reporting model for financial instruments to provide users of financial statements with more decision-useful information and
addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new standard
affects all entities that hold financial assets or owe financial liabilities. For public business entities, the amendments in
this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Management is evaluating the impact of the adoption of these changes will have on the consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in
“Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02
is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions
of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the
adoption of this standard on its consolidated financial statements.
Note
2 - License Agreements
CPAIR,
Inc.
Effective
November 11, 2011, IPR entered into an Exclusive License Agreement with CPAIR, Inc. (“CPaiR”) to acquire the rights
to market and distribute certain intellectual property on a worldwide basis except for the United States. The terms of the license
agreement shall be for the greater of the life of the provisional patents, for the technology, or twenty-one years. The term shall
automatically renew for an additional one year term unless either party notifies the other that it does not desire to renew the
license agreement ninety days before the then-current term of the license agreement expires. Under the Exclusive License Agreement,
if IPR enters into a sublicense agreement, IPR is required to pay CPaiR 20% of royalties received by IPR. If IPR elects to distribute
the product, without sublicenses, then CPaiR receives 10% of gross revenues. Also, IPR is required to pay to CPaiR 20% of any
upfront license fee actually received by IPR in connection with the CPaiR intellectual property and 20% of the quarterly revenue
actually received by IPR in connection with such intellectual property. If IPR does not pay a minimum of $1,000,000 to CPaiR within
a period of three years from the Effective date, the license agreement will terminate. IPR has the right to pay the difference
between the amounts paid by IPR and the minimum payment of $1,000,000. Under the terms of the agreement, IPR was not required
to pay an upfront license fee.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
American
Cryostem Corp.
Effective
January 27, 2012, IPR entered into a License Agreement with American Cryostem Corp. (“ACSC”) to acquire the rights
to and to distribute certain intellectual property in China and Brazil. The term of the License Agreement shall be for one year.
The term shall automatically renew for an additional one-year term unless either party notifies the other that it does not desire
to renew the License Agreement. Under the License Agreement, any distributer or sub-licensee, engaged by IPR, must pay 25% of
its quarterly gross revenue which shall be split 50/50 between IPR and ACSC. In the event that IPR receives any upfront license
fee from a sub-licensee, IPR is required to pay to ACSC 50% of that upfront license fee. Under the terms of the agreement, IPR
was not required to pay an upfront license fee.
Note
3 - Property and Equipment
The
following is a summary of equipment, at cost, less accumulated depreciation at December 31, 2016 and 2015:
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
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
|
|
|
62,407
|
|
|
|
46,575
|
|
|
|
$
|
15,825
|
|
|
$
|
31,657
|
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $15,833 and $14,773, 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
4 - Notes payable and Long Term Loan
Notes
Payable
In
October 2013, the Company initiated a private placement for up to $500,000 of financing by the issuance of notes payable at a
minimum of $25,000, one unit. The notes bear interest at 10% per annum and are due and payable with accrued interest one year
from issuance. Also, the Company agreed to issue 125,000 shares of its common stock for each unit. In July 2014, the Company initiated
a private placement for up to $500,000 of financing by the issuance of notes payable at a minimum of $25,000, one unit. The notes
bear interest at 10% per annum and are due and payable with accrued interest one year from issuance. Also, the Company agreed
to issue 50,000 shares of its common stock for each unit. In October 2014, the Company initiated a private placement for up to
$500,000 of financing by the issuance of notes payable at a minimum of $25,000, one unit. The notes bear interest at 10% per annum
and are due and payable with accrued interest one year from issuance. Also, the Company agreed to issue 50,000 shares of its common
stock for each unit. In August 2015, the Company initiated a private placement for up to $500,000 of financing by the issuance
of notes payable at a minimum of $25,000, one unit. The notes bear interest at 10% per annum and are due and payable with accrued
interest one year from issuance. Also, the Company agreed to issue 100,000 shares of its common stock for each unit. At issuance
of each private placement note payable agreement, the Company records a discount at the greater of the principal balance of the
note payable or the fair value of the common stock issued in connection with the note. The discount is amortized over the life
of each note, one year. During the year ended December 31, 2016, the Company did not issue notes in connection with these
private placements. During the year ended December 31, 2015, the Company issued promissory notes for an aggregate principal
of approximately $615,000, and recorded discounts amounting to $223,551 in connection with these. As of December
31, 2016, notes payable outstanding under these private placements are $1,075,500.
Of this amount, $1,065,000
of the outstanding balance on these notes are past maturity.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
During
the years ended December 31, 2016 and 2015, the Company issued ten and twelve, respectively, Convertible Debentures (“Variable
Debentures”) for cash of
$1,1421,778 and $921,250 with or
i
ginal
terms of 9 months to 3 years and interest rates ranging from 6% to 10% and add on interest of 10% which contain variable conversion
rates with a discount ranging from 25% to 53% of the Company’s common stock based on the terms included in the Variable
Debentures. Certain of the Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods
of 0-180 days subsequent to issuance at premiums ranging from 120% to145%. The Company recorded a derivative liability as a result
of the conversion feature. The derivative liability was allocated between a note discount, up to the value of the Variable Debenture,
and interest expense for the excess, and the note discount is being amortized over the life of the Variable Debenture. During
the years ended December 31, 2016 and 2015, the Company recorded $1,723,471 and $859,071, respectively, in discounts on these
Variable Debentures. As of December 31, 2016, the Variable Debentures outstanding have a balance due of $1,888,456. Of this amount
outstanding, $66,000 of the Variable Debentures were past maturity.
During
the year ended December 31, 2016, the Company entered into $70,000 in 2 notes payable with an unrelated party and issued 140,000
shares in connection with these notes. The notes bear interest at 10% per year and mature in May 2017. At December 31, 2016, $60,000
remained outstanding on this note.
During
July 2015, the Company entered into a settlement agreement with the holder of a $100,000 Variable Debenture wherein the Note was
exchanged for 900,000 shares of common stock, with the restriction that the shares may be sold from time to time at various prices
of $0.60 and above. During December 2015, the Company entered into a settlement agreement with the holder of a $38,000 Variable
Debenture wherein the Company repaid in full the Note balance with a cash payment of $56,590. In accordance with ASC 470-50, Debt
Modifications and Extinguishments, the Company recognized a $127,674 net loss on extinguishment of debt in connection with these
settlement agreements.
As
of December 31, 2016, the Company had notes payable to related parties amounting to $170,000. Refer to Note 6 – Related
Party Transactions.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Notes payable at beginning
of period
|
|
$
|
2,333,751
|
|
|
$
|
1,377,416
|
|
Notes payable issued
|
|
|
1,776,895
|
|
|
|
1,586,250
|
|
Default interest added to note payable
|
|
|
62,500
|
|
|
|
-
|
|
Settlements on note payable
|
|
|
(55,000
|
)
|
|
|
-
|
|
Repayments of notes payable in cash
|
|
|
(241,500
|
)
|
|
|
(138,000
|
)
|
Less amounts
converted to stock
|
|
|
(682,690
|
)
|
|
|
(491,915
|
)
|
Notes payable at end of period
|
|
|
3,193,956
|
|
|
|
2,333,751
|
|
Less debt discount
|
|
|
(1,145,849
|
)
|
|
|
(799,307
|
)
|
|
|
$
|
2,048,107
|
|
|
$
|
1,534,444
|
|
|
|
|
|
|
|
|
|
|
Notes payable
issued to related parties
|
|
$
|
170,000
|
|
|
$
|
245,000
|
|
Notes payable
issued to non-related parties
|
|
$
|
1,878,107
|
|
|
$
|
1,289,444
|
|
The maturity
dates on the notes payable are as follows:
Twelve
months ending,
|
|
|
Non-related
parties
|
|
|
Related
parties
|
|
|
Total
|
|
December
31, 2017
|
|
|
|
3,023,956
|
|
|
|
170,000
|
|
|
|
3,193,956
|
|
Total
|
|
|
$
|
3,023,956
|
|
|
$
|
170,000
|
|
|
$
|
3,193,956
|
|
Long
Term Loan
The
Company has financed the purchase of an automobile. The maturity dates on the loan are as follows:
Twelve months ending,
|
|
|
|
December 31, 2017
|
|
$
|
12,395
|
|
December 31,
2018
|
|
$
|
4,221
|
|
|
|
$
|
16,616
|
|
|
|
|
|
|
Current portion
|
|
$
|
12,395
|
|
Long term portion
|
|
$
|
4,221
|
|
Acquisition
Payable
In
connection with the Company’s acquisition of IPR in 2012, IPR recorded a $155,000 long-term acquisition payable for costs
that were not paid at closing. These payable is non-interest bearing and IPR agreed to make payments up to 25% of the proceeds
from any private placement or gross profits earned by IPR until the obligation is satisfied. The percentage of the proceeds to
be paid is at the sole discretion of IPR’s Chief Executive Officer and the ex-Chief Executive Officer of the Company based
on the liquidity of the Company.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Effective
Interest Rate
During
the year ended December 31, 2016 and 2015, the Company’s effective interest rate was 89% and 83%, respectively.
Note
5 - 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 year ended December 31, 2016, the Company issued 2,775,000 shares of common stock with a value of $953,250 related to these
consulting agreements.
During
the year ended December 31, 2016, the Company also issued 7,113,760 shares of common stock with a value of $1,411,722 for additional
services and fees.
During
the year ended December 31, 2016, the Company issued pursuant to a private placement offering 9,194,940 shares of common stock
and the same number of warrants for cash of $1,128,750 and conversion of notes and accrued interest in the amount of $308,608.
The Company also issued 566,327 shares of common stock for cash of $107,079 and 9,476,582 shares of common stock for the conversion
of notes and accrued interest in the amount of $1,957,717.
Also,
during the year ended December 31, 2016, the Company issued 266,617 shares of common stock valued at $111,661 related to the extension
of outstanding notes and lock-up agreements and 140,000 shares valued at $11, 080 were issued in connection with $70,000 notes
payable.
During
the year ended December 31, 2015, the Company granted 6,519,286 shares for services performed by consultants and recorded expense
of $728,750.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
During
the year ended December 31, 2015, the Company issued 1,855,000 shares of common stock to the purchasers of notes. The share issuance
was valued at $223,551.
During
the year ended December 31, 2015, the Company issued 800,000 shares of its common stock at a fair value of $61,750 on the extension
of notes payable. The fair value of stock issued on the extension of notes starting on July 1, 2015 was based on the market price
of the stock on the date of grant since significant trading started at that time.
In
addition, during the year ended December 31, 2015, the Company issued 13,450,592 shares of common stock on the conversion of notes
in an amount of $491,915 and accrued interest of $52,623.
Through
the six months ended June 30, 2015, the Company revalued the shares based on low trading volume to $0.001. The fair value of stock
issued for services and as for non-cash consideration starting on July 1, 2015 was based on the market price of the stock on the
date of grant since significant trading started at that time.
Warrants
During
the year ended December 31, 2016, in conjunction with the sale of Common Stock, the Company issued five-year common stock purchase
warrants to acquire up to 9,194,940 shares of common stock with exercise prices ranging from $0.0825 to $0.90 per share.
In
March 2016, the Company issued a two-year common stock purchase warrant exercisable into up to 300,000 shares of common stock
with an exercise price of $0.81 for services provided by a consultant. The value of these warrants was recorded as non-cash expense
in an amount of $40,000 using the Black Sholes Option pricing method.
The
Variable Debentures issued by the Company each have a provision requiring the Company to reserve a variable amount of shares of
common stock for when the holder of the Variable Debenture converts. As of December 31, 2016, the Company has reserved approximately
94,870,000 of common shares related to the outstanding debentures.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
A
summary of the status of the warrants granted under these agreements at December 31, 2016, and changes during the year then ended
is presented below:
|
|
Warrants
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,494,940
|
|
|
$
|
0.328
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding, December 31, 2016
|
|
|
9,494,940
|
|
|
$
|
0.328
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
9,494,940
|
|
|
$
|
0.328
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0825-0.1695
|
|
|
|
3,342,963
|
|
|
|
4.89
|
|
|
$
|
0.116
|
|
|
|
3,342,963
|
|
|
$
|
0.116
|
|
$
|
0.195-0.30
|
|
|
|
2,962,114
|
|
|
|
4.57
|
|
|
$
|
0.232
|
|
|
|
2,962,114
|
|
|
$
|
0.232
|
|
$
|
0.452-0.5775
|
|
|
|
652,489
|
|
|
|
4.14
|
|
|
$
|
0.529
|
|
|
|
652,489
|
|
|
$
|
0.529
|
|
$
|
0.5805-0.6525
|
|
|
|
1,597,314
|
|
|
|
4.24
|
|
|
$
|
0.603
|
|
|
|
1,597,314
|
|
|
$
|
0.603
|
|
$
|
0.6735-0.90
|
|
|
|
940,060
|
|
|
|
4.26
|
|
|
$
|
0.773
|
|
|
|
940,060
|
|
|
$
|
0.773
|
|
|
|
|
|
|
9,494,940
|
|
|
|
4.57
|
|
|
$
|
0.328
|
|
|
|
9,494,940
|
|
|
$
|
0.328
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to 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 December 31, 2016, there were 1,000 shares of Series AA Preferred
stock outstanding.
Note
6 – Related Party Transactions
Two
executive officers and the operations manager of the Company have agreed to defer their compensation until cash flow
improves. As of December 31, 2016, the balance of their deferred compensation is approximately $1,861,327.
From
time-to-time officers and the operations manager of the Company advance monies to the Company to cover costs. During the
year ended December 31, 2016, officers advanced $12,618 of funds to the Company of which $10,300 were repaid during the
year. The balance of short-term advances due to two officers and executives of the Company at December 31, 2016 is $5,823.
During
the year ended December 31, 2015, an officer and executive of the Company entered into a note payable agreement for $50,000, and
the principal and interest of a $96,000 note payable to another related party was converted into 350,000 shares of common stock.
During the year ended December 31, 2016, the Company repaid the principal and interest of a $75,000 note payable to its operations
manager. At December 31, 2016, notes payable remain outstanding to one officer and executive of the Company, in the amount of
$170,000.
Note
7 - Income taxes
The
Company files income tax returns with the Internal Revenue Service (“IRS”) and various state jurisdictions. For jurisdictions
in which tax filings are prepared, the Company is subject to income tax examinations by state tax authorities and federal tax
authorities for all tax years.
The
deferred tax assets are mainly comprised of net loss carryforwards. As of December 31, 2016, the Company had approximately $9,743,000
of federal net operating loss carryforwards, that it can use to offset a certain amount of taxable income in the future. These
federal net operating loss carryforwards begin to expire in 2029. The resulting deferred tax asset is offset by
a 100% valuation allowance due to the uncertainty of its realization.
A
reconciliation of the provision for income tax expense with the expected income tax computed by applying the federal statutory
income tax rate to income before provision for income taxes was as follows for the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Income tax computed at federal
statutory tax rate
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
Change in valuation allowance
|
|
|
39.8
|
%
|
|
|
39.8
|
%
|
State taxes, net of federal benefit
|
|
|
-5.8
|
%
|
|
|
-5.8
|
%
|
Total
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
primary difference between income tax expense attributable to continuing operations and the amount of income tax expense that
would result from applying domestic federal statutory rates to income before provision for income taxes relates to the change
in the valuation allowance.
The
Company has adopted the accounting standards that clarify the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company
must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the
technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to
include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for
the years ended December 31, 2016 and 2015.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Note
8 - Commitments and Contingencies
Legal
matters
The
Company may become involved in various legal proceedings in the normal course of business.
Note
9 - Subsequent Events.
Subsequent
to December 31, 2016, an aggregate of
747,336
shares of restricted common stock were issued as compensation to independent
contractors.
Subsequent
to December 31, 2016, the Company raised $334,034 from
21
investors as part of a Private Placement and issued
14,518,444
warrants.
Subsequent
to December 31, 2016, the Company entered into agreements to raise $2,737,000 of Convertible Redeemable Notes with one existing
investor of which $518,750 has been received to date. These notes have a 10% per annum interest rate, favorable redemption options
and leak out provisions restricting the total sales to no more than 20% of the total daily volume of the company’s stock
in any given day.
Subsequent
to December 31, 2016, the Company agreed to an assignment of the Bellridge Capital LLC Notes to its sole existing variable
securities investor with favorable redemption options and leak out provisions. To date, the investor has paid Bellridge $334,255
to acquire the remainder of the first note and has agreed to acquire the remaining two notes.
Subsequent
to December 31, 2016, the Company converted $
708,226
in Notes Payable and Variable Debentures outstanding
at December 31, 2016 through the issuance of
73,791,386
of restricted shares of common stock.
Subsequent
to December 31, 2016, the Company’s authorized share count was increased to 500,000,000.
Subsequent
to December 31, 2016, On February 7, 2017, we filed a certificate of designation (“the “Designation”) relating
to our newly designated Series B Convertible Preferred Stock (the “B Preferred”). The Designation created 50,000 shares
of B Preferred from the 5,000,000 shares of preferred stock that our board may designate from time to time. Each share of B Preferred
has a liquidation preference and stated value of $100, is convertible into units of common stock and warrants analogous to the
common stock and warrants issued in our ongoing private placement commencing. Such conversion right commences six months from
the date of issuance, but the pricing terms are fixed on the date of investment.
As
a result of these issuances the total number of shares outstanding is 221,543,486.