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 non-invasive
electroceutical™ device.
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, 2018 and 2017 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 accompanying
financial information should be read in conjunction with the financial statements and the notes thereto in the Company’s
most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on April
6, 2018. 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 the twelve month period
following the date these consolidated financial statements are issued. The Company has raised approximately $1,357,500 in debt
and equity financing for the period January 1, 2018 to June 30, 2018. 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 is commercializing its FDA
cleared and CE marked products and has partially 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 preferred and common stock
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 condensed 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, the valuation of warrants and stock options, 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 Condensed 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, common shares issuable
under convertible debt, warrants and restricted stock using the treasury stock method when dilutive.
Accounts
Receivable
The
Company uses the specific identification method for recording the provision for doubtful accounts, which was $0 at June 30, 2018
and December 31, 2017. Accounts receivable are written off when all collection attempts have failed.
Research
and Development
Costs
relating to the development of new products are expensed as research and development as incurred in accordance with FASB Accounting
Standards Codification (“ASC”) 730-10,
Research and Development
. Research and development costs amounted to
$43,727 and $0 for the three months ended June 30, 2018 and 2017 and $157,835 and $0 for the six months ended June 30, 2018 and
2017, respectively, and are included in operating expenses in the condensed consolidated statements of operations.
Recently
Issued Accounting Pronouncements
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 does not expect the adoption of this standard
to significantly impact its consolidated financial statements.
In
2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”),
which provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement
of cash flows and ASU 2016-18,
Restricted Cash
(“ASU 2016-18”), which requires an entity to show the changes
in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-15 and
ASU 2016-18 are effective for us beginning January 1, 2017 and was applied by us using a retrospective transition method. Adoption
of these standards did not have an impact on our Consolidated Financial Statements.
In
2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”), which
requires a company to recognize the tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer
occurs. ASU 2016-16 is effective for us beginning January 1, 2017 and was applied by us using a modified retrospective method.
Adoption of this standard did not have an impact on our Consolidated Financial Statements.
On
January 1, 2017, we adopted ASU 2016-09,
Compensation - Stock Compensation
(“ASU 2016-09”) which simplifies
several aspects of the accounting for employee share-based payment transactions, including the accounting for forfeitures and
statutory tax withholding requirements, as well as classification in the statement of cash flows. Adoption of ASU 2016-09 did
not have a significant impact on our Consolidated Financial Statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (“ASU 2017-01”) which provided new guidance clarifying
the definition of a business for determining whether transactions should be
accounted
for as acquisitions (or disposals) of assets or businesses. The new standard is effective for annual periods, and interim periods
within those annual periods, beginning after December 15, 2017 with early adoption permitted for transactions that occurred before
the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been
issued or made available for issuance. Upon early adoption, the standard did not impact how we assess acquisitions (or disposals)
of assets or businesses.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) that simplifies the test for goodwill
impairment by eliminating step two from the goodwill impairment test. Under the new guidance, an entity should recognize an impairment
charge for the amount based on the excess of a reporting unit’s carrying amount over its fair value. The impairment charge
will be limited to the amount of goodwill allocated to that reporting unit. For public companies, the guidance is effective for
annual and interim impairment tests performed in periods beginning after December 15, 2019 on a prospective basis, and earlier
adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this guidance
during the three months ended March 2017, and the adoption did not impact our financial statements.
In
May 2014, the FASB issued ASU 2014-09 and modified the standard thereafter within Accounting Standards Codification (“ASC”)
Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). The objective of ASU 2014-09 is to establish
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most of the existing revenue recognition guidance. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified
retrospective method. The adoption of ASU 2014-09 did not have a significant impact on the Company’s consolidated results
of operations, financial position and cash flows. See Note 2.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting
from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for
acquiring goods and services from nonemployees. This ASU is effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating
the impact of the new guidance on our consolidated financial statements.
In
July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. The amendments in this Update affect
the amendments in Update 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities
that early adopted Topic 842, the amendments are effective upon issuance of this Update, and the transition requirements are the
same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will
be the same as the effective date and transition requirements in Topic 842. The Company has not yet selected a transition method
nor has it determined the effect of the standard on its ongoing financial reporting.
The
Company has evaluated all the recent accounting pronouncements and determined that there are no other accounting pronouncements
that will have a material effect on the Company’s financial statements.
2.
Revenue Recognition
Contracts
with Customers
We
have adopted ASC 606,
Revenue from Contracts with Customers
effective January 1, 2018 using the modified retrospective
method applied to those contracts which were not substantially completed as of January 1, 2018
.
These standards provide
guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard
requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues for
2018 are reported under ASC 606, while prior period amounts are not adjusted and continue to be reported under ASC 605,
Revenue
Recognition
.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
We
routinely plan on entering into contracts with customers that include general commercial terms and conditions, notification requirements
for price increases, shipping terms and in most cases prices for the products and services that we offer. Our performance obligations
are established when a customer submits a purchase order notification (in writing, electronically or verbally) for goods and services,
and we accept the order. We identify performance obligations as the delivery of the requested product or service in appropriate
quantities and to the location specified in the customer’s contract and/or purchase order. We generally recognize revenue
upon the satisfaction of these criteria when control of the product or service has been transferred to the customer at which time
we have an unconditional right to receive payment. Our sales and sale prices are final and our prices are not affected
by contingent events that could impact the transaction price.
Revenues
for our SofPulse® product is typically recognized at the time the product is shipped, at which time the title passes to the
customer, and there are no further performance obligations.
In
connection with offering products and services provided to the end user by third-party vendors, we review the relationship between
us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In asserting whether revenue
should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods
and services used to fulfill the performance obligation(s) associated with the transaction.
During
the three months ended June 30, 2018, we recognized net revenues of $10,073 from products with a selling price of $21,023 and
gross revenue of $2,781 from products we sold as a principal in the transaction. During the six months ended June 30, 2018, we
recognized net revenue of $17,045 from products with a selling price of $43,196 and gross revenue of $2,781 from products we sold
as a principal in the transaction.
Sources
of Revenue
We
have identified the following revenues disaggregated by revenue source:
As
of June 30, 2018 and 2017 the sources of revenue were as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor-
Plastic surgeons, net
|
|
$
|
10,073
|
|
|
$
|
-
|
|
|
$
|
17,045
|
|
|
$
|
-
|
|
Direct
sales- Plastic surgeons, gross
|
|
|
2,781
|
|
|
|
-
|
|
|
|
2,781
|
|
|
|
-
|
|
Total
sources of revenue
|
|
$
|
12,854
|
|
|
$
|
-
|
|
|
$
|
19,826
|
|
|
$
|
-
|
|
Warranty
Our
general product warranties do not extend beyond an assurance that the product delivered will be consistent with stated specifications
and do not include separate performance obligations.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Significant
Judgments in the Application of the Guidance in ASC 606
There
are no significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance
obligations upon delivery of the product to the customer. This is consistent with the time in which the customer obtains control
of the products. Performance obligations are also generally settled quickly after the purchase order acceptance, therefore the
value of unsatisfied performance obligations at the end of any reporting period is generally immaterial.
We
consider variable consideration in establishing the transaction price. Forms of variable consideration applicable to our arrangements
include sales returns, rebates, volume-based bonuses, and prompt pay discounts. We use historical information along with an analysis
of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts
are included as a reduction to revenue from the sale of products in the periods in which the related revenue is recognized and
adjusted in future periods as necessary.
Practical
Expedients
Our
payment terms for sales direct to distributors are substantially less than the one-year collection period that falls within the
practical expedient in determination of whether a significant financing component exists.
Taxes
Collected from Customers
Taxes
collected on the value of transaction revenue are excluded from product revenues and are accrued in current liabilities until
remitted to governmental authorities.
Effective
Date and Transition Disclosures
Adoption
of the new standards related to revenue recognition did not have a material impact on our consolidated financial statements.
Note
3 – Property, Plant and Equipment
The
following is a summary of equipment, at cost, less accumulated depreciation at June 30, 2018 and December 31, 2017:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Autos
|
|
$
|
64,458
|
|
|
$
|
64,458
|
|
Medical
equipment
|
|
|
13,969
|
|
|
|
5,000
|
|
Other
equipment
|
|
|
8,774
|
|
|
|
8,774
|
|
|
|
|
87,201
|
|
|
|
78,232
|
|
Less
accumulated depreciation
|
|
|
78,447
|
|
|
|
77,168
|
|
|
|
$
|
8,754
|
|
|
$
|
1,064
|
|
Depreciation
expense for the six months ended June 30, 2018 and 2017 was $1,279 and $7,381, 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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
4 – Patents
In
December 2017, we acquired from Rio Grande Neurosciences, Inc. (RGN) a patent portfolio for $4,500,000 as part of a settlement
agreement. The oldest patents expire in 2024. The patent portfolio is amortized through 2024. The following is a summary of patents
less accumulated amortization at June 30, 2018 and December 31, 2017:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated amortization
|
|
|
323,455
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,176,545
|
|
|
$
|
4,500,000
|
|
Amortization
expense associated with patents was $323,455 and $0 for the six months ended June 30, 2018 and 2017. The estimated future amortization
expense related to patents as of June 30, 2018 is as follows:
Twelve
Months Ending June 30,
|
|
Amount
|
|
|
|
|
|
2019
|
|
$
|
646,910
|
|
2020
|
|
|
646,910
|
|
2021
|
|
|
646,910
|
|
2022
|
|
|
646,910
|
|
2023
|
|
|
646,910
|
|
Thereafter
|
|
|
941,995
|
|
Total
|
|
$
|
4,176,545
|
|
Note
5 - Notes Payable and Long Term Loan
Notes
Payable
During
the six months ended June 30, 2018, the Company issued two Convertible Notes (“Variable Notes”) totaling $367,370
for funding of $325,000 with an original terms of one year with interest rates of 10%, and a variable conversion rates with discounts
of 35% of the Company’s common stock based on the terms included in the Variable Note. The Variable Notes contains a prepayment
option, which enables the Company to prepay the note subsequent to issuance at a premiums of 135%. The Company also issued two
Fixed Rate Notes (“Fixed Rate Notes”) totaling $583,000 for funding of $500,000 with an original term of six months
and an interest rate of 12%.
The
gross amount of all convertible notes with variable conversion rates outstanding at June 30, 2018 is $4,116,120, of which $1,528,750
are past maturity.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Notes
payable to a related party in the aggregate amount of $270,000 were outstanding at June 30, 2018.
As
of June 30, 2018, other notes payable outstanding totaled $3,102,903, of which $919,903 are past maturity.
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Notes
payable at beginning of period
|
|
$
|
7,356,144
|
|
|
$
|
3,193,956
|
|
Notes
payable issued
|
|
|
950,370
|
|
|
|
5,837,070
|
|
Settlements
on note payable
|
|
|
(47,500
|
)
|
|
|
(95,597
|
)
|
Repayments
of notes payable in cash
|
|
|
(12,500
|
)
|
|
|
(96,000
|
)
|
Less
amounts converted to stock
|
|
|
(757,491
|
)
|
|
|
(1,483,285
|
)
|
Notes
payable at end of period
|
|
|
7,489,023
|
|
|
|
7,356,144
|
|
Less
debt discount
|
|
|
(1,355,554
|
)
|
|
|
(2,624,984
|
)
|
|
|
$
|
6,133,469
|
|
|
$
|
4,731,160
|
|
|
|
|
|
|
|
|
|
|
Notes
payable issued to related parties
|
|
$
|
270,000
|
|
|
$
|
270,000
|
|
Notes
payable issued to non-related parties
|
|
$
|
5,863,469
|
|
|
$
|
4,461,160
|
|
The
maturity dates on the notes payable are as follows:
Twelve
months ending,
|
|
Non-related
parties
|
|
|
Related
parties
|
|
|
Total
|
|
Past
due
|
|
$
|
2,448,653
|
|
|
$
|
-
|
|
|
$
|
2,448,653
|
|
June
30, 2019
|
|
|
4,770,370
|
|
|
|
270,000
|
|
|
|
5,040,370
|
|
Total
|
|
$
|
7,219,023
|
|
|
$
|
270,000
|
|
|
$
|
7,489,023
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
6 - Shareholders’ Deficit
Preferred
Stock
The
Company has authorized 5,000,000 shares of preferred stock which have been designated as follows:
|
|
Number
of Shares
Authorized
|
|
|
Number
of Shares Outstanding at June 30, 2018
|
|
|
Par
Value
|
|
|
Liquidation
Value
|
|
Series
AA
|
|
|
1,000,000
|
|
|
|
5,000
|
|
|
$
|
0.0001
|
|
|
$
|
-
|
|
Preferred
Series B
|
|
|
50,000
|
|
|
|
1,350
|
|
|
$
|
0.0001
|
|
|
$
|
100
|
|
Preferred
Series C
|
|
|
8,000
|
|
|
|
1,037
|
|
|
$
|
0.0001
|
|
|
$
|
1,000
|
|
Undesignated
|
|
|
3,942,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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. The Series AA Super Voting Preferred Stock holders will receive no dividends
nor any value on liquidation. As of June 30, 2018, there were 5,000 shares of Series AA Preferred stock outstanding.
Series
B Convertible Preferred Stock
On
February 7, 2017, the Company filed a certificate of designation for 50,000 shares of Series B Convertible Preferred Stock designated
as Series B (“Series B”) which are authorized and convertible, at the option of the holder, commencing six months
from the date of issuance into common shares and warrants. For each share of Series B, the holder, on conversion, shall receive
the stated value divided by 75% of the market price on the date of purchase of Series B and a three-year warrant exercisable into
up to a like amount of common shares with an exercise price of 150% of the market price as defined in the Certificate of Designation.
Dividends shall be paid only if dividends on the Company’s issued and outstanding Common Stock are paid and the amount paid
to the Series B holder will be as though the conversion shares had been issued. The Series B holders have no voting rights. Upon
liquidation, the holder of Series B, shall be entitled to receive an amount equal to the stated value, $100 per share, plus any
accrued and unpaid dividends thereon before any distribution is made to Series C Secured Redeemable Preferred Stock or common
stockholders. As of June 30, 2018, 1,350 shares of Series B and 4,805,600 warrant shares have been issued and are outstanding.
Series
C Secured Redeemable Preferred Stock
On
December 22, 2017, the Company filed a certificate of designation for 8,000 shares of Series C Secured Redeemable Preferred Stock
(“Series C”). Each share of the C Preferred is entitled to receive a $20.00 quarterly dividend commencing March 31,
2018 and each quarter thereafter and is to be redeemed for the stated value, $1,000 per share, plus accrued dividends in cash
(i) at the Company’s option, commencing one year from issuance and (ii) mandatorily as of December 31, 2019. The C Preferred
does not have any rights to vote with the common stock. Upon liquidation, the holder of Series C, shall be entitled to receive
an amount equal to the stated value, $1,000 per share, plus any accrued and unpaid dividends thereon before any distribution is
made to common stockholders but after distributions are made to holders of Series B. Since the C Preferred is mandatorily payable,
the obligation has been included in long term liabilities on the consolidated balance sheets as of June 30, 2018 and December
31, 2017. The Company’s obligation to redeem the C Preferred is secured by a security interest in the RGN Assets. As of
June 30, 2018, the Company has sold 1,037 shares of C Preferred in units comprised of shares of C Preferred and common stock purchase
warrants exercisable into up to 4,490,738 shares of common stock for consideration of $1,037,500. The warrants resulted in a debt
discount of $115,596 and $101,808 at June 30, 2018 and December 31, 2017, respectively, and are recorded as a discount to the
preferred stock liability on the consolidated balance sheet.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Common
Stock
During
the six months ended June 30, 2018, the Company issued pursuant to a private placement offering 1,561,950 shares of common stock
and the same number of warrants for cash of $60,000. The Company also issued 34,225,740 shares of common stock for the conversion
of notes and accrued interest in the amount of $824,053.
During
the six months ended June 30, 2018, the Company issued 17,003 shares of common stock valued at $1,046 related to the extension
of outstanding notes and lock-up agreements.
During
the six months ended June 30, 2018, the Company issued 125,000 shares of common stock with a value of $5,460, related to services
and fees.
During
the six months ended June 30, 2018, the Company issued 3,387,534 shares of common stock with a value of $116,531 as a commitment
to repay a note payable on its stated terms. If the note is satisfactorily repaid, the shares shall be rescinded. Until it is
determined if the terms of the note will be met, the value of the shares is being reflected as a discount to the note.
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.
Stock
Options
The
balance of all stock options outstanding as of June 30, 2018 is as follows:
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
|
|
|
Aggregate
Intrinsic
|
|
|
|
Options
|
|
|
Per
Share
|
|
|
Term
(years)
|
|
|
Value
|
|
Outstanding
at January 1, 2018
|
|
|
93,203,369
|
|
|
$
|
0.029
|
|
|
|
3.96
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2018
|
|
|
93,203,369
|
|
|
$
|
0.029
|
|
|
|
3.46
|
|
|
$
|
624,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
|
|
93,203,369
|
|
|
$
|
0.029
|
|
|
|
3.46
|
|
|
$
|
624,463
|
|
Warrants
During
the six months ended June 30, 2018, in conjunction with the sale of Common Stock, the Company issued three-year common stock purchase
warrants to acquire up to 1,561,950 shares of common stock with exercise prices ranging from $0.0734 to $1.00 per share.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In
addition, during the six months ended June 30, 2018, the Company issued a five-year common stock purchase warrant to acquire up
to 2,000,000 shares of common stock valued at $71,521 with an exercise price of $0.05 in conjunction with the issuance of a note
payable; three-year common stock purchase warrants to acquire up to 4,805,600 shares of common stock with exercise prices ranging
from $0.051 to $1.00 in conjunction with the issuance of Series B preferred stock; two-year common stock purchase warrants to
acquire up to 1,765,469 shares of common stock with exercise prices ranging from $0.0355 to $0.0516 in conjunction with the issuance
of Series C preferred stock; a 2-year common stock purchase warrant to acquire up to 6,200,000 shares of common stock valued at
$380,750 with an exercise price of $0.0001; and two-year common stock purchase warrants to acquire up to 642,157 shares of common
stock with exercise prices ranging from $0.0368 to $0.0370 in conjunction with the extension of certain notes payable.
The
Company measures the fair value of warrants issued using the Black Scholes option pricing model using the following assumptions:
|
|
|
Six
months ended
June
30, 2018
|
|
|
|
|
|
|
Expected
term
|
|
|
2
years - 5 years
|
|
Exercise
price
|
|
|
$0.0001-$0.0516
|
|
Expected
volatility
|
|
|
166%-193
|
%
|
Expected
dividends
|
|
|
None
|
|
Risk-free
interest rate
|
|
|
1.92%
to 2.65
|
%
|
Forfeitures
|
|
|
None
|
|
A
summary of the status of the warrants granted under these agreements at June 30, 2018, and changes during the three months then
ended is presented below:
|
|
Outstanding
Warrants
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Exercise
Price
|
|
|
|
Shares
|
|
|
Per
Share
|
|
Outstanding
at January 1, 2018
|
|
|
61,807,992
|
|
|
$
|
0.31
|
|
Granted
|
|
|
16,975,176
|
|
|
$
|
0.21
|
|
Cancelled
|
|
|
(300,000
|
)
|
|
$
|
0.81
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
at June 30, 2018
|
|
|
78,483,168
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
|
|
78,483,168
|
|
|
$
|
0.29
|
|
As
of June 30, 2018, the Company has 500,000,000 shares of common stock authorized. After the exercise of stock options and warrants
and the conversion of variable rate debentures, the Company could potentially have a shortfall of common stock. Should there be
a shortfall in common stock, the shareholders of the Company would need to approve an increase in the authorized common stock
to an amount sufficient to satisfy such exercises and conversions or reclassify the obligations to liabilities payable in some
form other than common stock.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Note
7 – Related Party Transactions
One
executive of the Company has entered into note payable agreements with the Company. The balance of notes payable from related
parties at June 30, 2018 is $270,000.
As
of June 30, 2018 and December 31, 2017, the balance of executives’ deferred compensation is $968,150 and $922,425, respectively.
From
time-to-time executives of the Company advance monies to the Company to cover costs. During the three months ended June 30, 2018,
executives advanced $65,000 of funds to the Company and received payments of $87,000 resulting in a $0 balance of short-term advances
due to executives at June 30, 2018.
Note
8 – Fair Value Measurements
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
pricing model using the following assumptions:
|
|
Six
months ended June 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Expected
term
|
|
1
month - 1 year
|
|
8
months - 5 years
|
Exercise
price
|
|
$0.0195-$0.0326
|
|
$0.0203-$0.28
|
Expected
volatility
|
|
127%-195%
|
|
184%-276%
|
Expected
dividends
|
|
None
|
|
None
|
Risk-free
interest rate
|
|
1.79%
to 2.35%
|
|
0.45%
to 1.79%
|
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. 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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
The
following table presents changes in the liabilities with significant unobservable inputs (level 3) for the six months ended June
30, 2018:
|
|
Derivative
Liability
|
|
Balance
December 31, 2017
|
|
$
|
5,939,600
|
|
|
|
|
|
|
Issuance
of convertible debt
|
|
|
461,860
|
|
Settlements
by debt settlement
|
|
|
(820,357
|
)
|
Change
in estimated fair value
|
|
|
(2,461,179
|
)
|
|
|
|
|
|
Balance
June 30, 2018
|
|
$
|
3,119,924
|
|
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 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 pricing 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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
The
following table presents balances in the liabilities with significant unobservable inputs (Level 3) at June 30, 2018:
|
|
Fair
Value Measurements Using
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,119,924
|
|
|
$
|
3,119,924
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,119,924
|
|
|
$
|
3,119,924
|
|
Note
9 – Commitments and Contingencies
|
Legal
Matters
|
|
|
|
The
Company may become involved in various legal proceedings in the normal course of business.
|
Note
10 – Subsequent Events
Subsequent
to June 30, 2018, an aggregate of 9,849,828 shares of restricted common stock were issued on the conversion of $175,000 of principal
and $19,922 of accrued interest pursuant to one Variable Note.
Subsequent
to June 30, 2018, the Company received $175,000 of funding in connection with a $189,000 convertible note due on July 3, 2019
bearing interest at a rate of 10%.
Subsequent
to June 30, 2018, the Company received $144,000 of funding in connection with a $157,500 convertible note due on August 3, 2019
bearing interest at a rate of 10%.
Subsequent
to June 30, 2018, the Company received $130,000 of cash from the issuance of 130 shares of Preferred C Stock and issued two-year
warrants for the exercise up to 756,068 shares of common stock with an exercise prices ranging from $0.0299 to $0.035.
As
a result of these issuances, the total number of common shares outstanding is 366,118,767, Preferred B shares outstanding is 1,350
and Preferred C shares outstanding is 1,168.