Notes
to Condensed Consolidated Financial Statements
Note
1 - Organization and Nature of Business
Endonovo
Therapeutics, Inc. (Endonovo or the “Company”) is an innovative biotechnology company that has developed a bio-electronic
approach to regenerative medicine. Endonovo is a growth stage company whose stock is publicly traded (OTCQB: ENDV).
The Company develops, manufactures and distributes
evolutionary medical devices focused on the rapid healing of wounds and reduction of pain, edema and inflammation in the
human body. The Company’s non-invasive bioelectric medical devices are designed to target inflammation, cardiovascular diseases,
chronic kidney disease, and central nervous system disorders (“CNS” disorders).
The Company’s non-invasive Electroceutical™
therapeutic device, SofPulse®, using pulsed short-wave radiofrequency at 27.12 MHz has been FDA-Cleared and CE Marked for
the palliative treatment of soft tissue injuries and post-operative pain and edema, and has CMS National Coverage for the treatment
of chronic wounds. The Company’s current portfolio of pre-clinical stage Electroceuticals™ therapeutic devices address chronic
kidney disease, liver disease non-alcoholic steatohepatitis (NASH), cardiovascular and peripheral artery disease (PAD), and ischemic
stroke.
Endonovo’s
core mission is to transform the field of medicine by developing safe, wearable, non-invasive bioelectric medical devices that
deliver the Company’s Electroceutical® Therapy. Endonovo’s bioelectric Electroceutical®
devices harnesses bioelectricity to restore key electrochemical processes that initiate anti-inflammatory processes and
growth factors in the body necessary for healing to rapidly occur.
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.
Note
2 – Summary of significant accounting policies
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, 2020 and 2019 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 May 4,
2020. 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
condensed 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 condensed 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 condensed consolidated financial statements are issued.
As
of June 30, 2020, the Company had cash of approximately $5,300 and a working capital deficiency of $14.9 million. During the six
months ended June 30, 2020, the Company used approximately $0.5 million of cash in its operation. The Company has incurred recurring
losses resulting in an accumulated deficit of approximately $50.2 million as of June 30, 2020. These conditions raise substantial
doubt as to its ability to continue as going concern within one year from issuance date of these financial statements.
During
the six months ended June 30, 2020, the Company has raised approximately $0.5 million in debt and equity financing. The Company
is raising additional capital through debt and equity securities 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
commenced implementing its business plan to materialize revenues from potential, future, license agreements, has raised capital
through the sale of its preferred and common stock, has entered into an investment agreement whereby the company has access to
an equity line of credit and is seeking out profitable companies.
In
March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which
has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and
financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration
or magnitude of the adverse results of the outbreak and its effects on the Company’s business or ability to raise funds.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Reverse
Split
In
October 2019, the Company’s Board of Directors and stockholders approved an amendment to the Company’s amended and
restated certificate of incorporation to effect a 1,000-for-1 reverse split of the Company’s common stock, which was effected
on December 20, 2019. The par value of the common stock was not adjusted as a result of the reverse stock split. Accordingly,
all common stock, stock options, warrants and related per share amounts as of and for the quarter ended June 30, 2019 have been
retroactively adjusted to give effect to the reverse split.
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.
Earnings
(Loss) Per Share
The
Company utilizes Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
260, “Earnings per Share.” Basic earnings (loss) per share is computed based on the earnings (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 earnings (loss) per common share is calculated
similar to basic earnings (loss) per share except that the denominator is increased to include additional common share equivalents
available upon exercise of stock option, warrants, common shares issuable under convertible debt and restricted stock using the
treasury stock method. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which
are calculated based on the average share price for each period using the treasury stock method, excluding any common share equivalents
if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common shares
are considered anti-dilutive and thus are excluded from the calculation.
The
components of basic and diluted earnings per share for the six months ended June 30, 2020 and 2019 were as follows:
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
2,703,767
|
|
|
$
|
(10,243,771
|
)
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
(4,921,950
|
)
|
|
|
-
|
|
Net loss for diluted earnings per share
|
|
$
|
(2,218,183
|
)
|
|
$
|
(10,243,771
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding during the period
|
|
|
6,368,643
|
|
|
|
529,924
|
|
Dilutive effect of convertible notes payable
|
|
|
8,696,619
|
|
|
|
-
|
|
Common stock and common stock equivalents used for diluted earnings per share
|
|
|
15,065,162
|
|
|
|
529,924
|
|
Accounts
Receivable
The
Company uses the specific identification method for recording the provision for doubtful accounts, which was $0 at June 30, 2020
and December 31, 2019. 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
$3,283 and $53,314 for the six months ended June 30, 2020 and 2019, respectively, and are included in operating expenses in the
condensed consolidated statements of operations.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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 condensed 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 has adopted ASU 2016-02 on
January 1, 2019. The adoption of ASU 2016-02 did not have a significant impact on the Company’s condensed consolidated results
of operations, financial position and cash flows.
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 has early adopted ASU
2018-07 and the adoption did not have a significant impact on the Company’s condensed consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure
Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements
in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and
benefits. Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments
should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance
of this Update. Any entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay
adoption of the additional disclosures until their effective date. The Company adopted ASU 2018-13 as of January 1, 2020, and
ASU 2018-13 has not had a material impact on the condensed consolidated financial position or results of operations and liquidity.
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.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
3 - Revenue Recognition
Contracts
with Customers
We
have adopted ASC 606, Revenue from Contracts with Customers effective January 1, 2019 using the modified retrospective
method applied to those contracts which were not substantially completed as of January 1, 2019. 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.
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.
Sources
of Revenue
We
have identified the following revenues by revenue source:
|
1.
|
Medical
care providers
|
As
of June 30, 2020, and 2019, the sources of revenue were as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct sales- Medical care providers, gross
|
|
$
|
44,631
|
|
|
$
|
62,729
|
|
|
$
|
114,316
|
|
|
$
|
107,681
|
|
Total sources of revenue
|
|
$
|
44,631
|
|
|
$
|
62,729
|
|
|
$
|
114,316
|
|
|
$
|
107,681
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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.
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.
Note
4 – Property, Plant and Equipment
The
following is a summary of equipment, at cost, less accumulated depreciation at June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Autos
|
|
$
|
64,458
|
|
|
$
|
64,458
|
|
Medical equipment
|
|
|
13,969
|
|
|
|
13,969
|
|
Other equipment
|
|
|
11,367
|
|
|
|
11,367
|
|
|
|
|
89,794
|
|
|
|
89,794
|
|
Less accumulated depreciation
|
|
|
86,408
|
|
|
|
83,879
|
|
|
|
$
|
3,386
|
|
|
$
|
5,915
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Depreciation
expense for the six months ended June 30, 2020 and 2019 was $2,529 and $1,598, respectively.
Note
5 – Patents
In
December 2017, we acquired from Rio Grande Neurosciences, Inc. (RGN) a patent portfolio for $4,500,000. The earliest patents expire
in 2024. The following is a summary of patents less accumulated amortization at June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization
|
|
|
1,617,276
|
|
|
|
1,293,820
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,882,724
|
|
|
$
|
3,206,180
|
|
Amortization
expense associated with patents was $323,456 and $323,455 for the six months ended June 30, 2020 and 2019, respectively. The estimated
future amortization expense related to patents as of June 30, 2020 is as follows:
Twelve Months Ending June 30,
|
|
Amount
|
|
|
|
|
|
2021
|
|
$
|
646,910
|
|
2022
|
|
|
646,910
|
|
2023
|
|
|
646,910
|
|
2024
|
|
|
646,910
|
|
2025
|
|
|
295,084
|
|
|
|
|
|
|
Total
|
|
$
|
2,882,724
|
|
Note
6- Notes Payable
Notes
Payable
During
the six months ended June 30, 2020, the Company issued five fixed rate promissory notes totaling $800,000 for funding of $401,424
with original terms of six to twelve months and interest rates of 8% to 10%. If the notes are not paid at maturity, two of the
five notes will bear a 22% default interest rate and the other three will bear a 24% default interest rate. As of June 30, 2020,
all of the new notes remain outstanding and are not in default.
During
the six months ended June 30, 2020, the Company converted two previous fixed rate notes into variable rate notes in an accumulated
amount of $558,250 as a result of the notes not being paid at maturity and, therefore, triggering a conditional conversion option
for the noteholder. The conversion rate is 70% and 75% of the Company’s common stock based on the terms included in the
variable rate notes. As of June 30, 2020, the Company exchanged one of the variable notes with $316,494 unamortized principal
and accrued interest into one fixed rate promissory notes for $525,000 due in twelve months from issuance date and convertible
upon an event of default. The Company recorded the exchange in accordance with ASC 470-50 Debt-Modifications and Extinguishments
and recorded $151,496 as gain from debt extinguishment in the condensed consolidated statements of operations.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
The
gross amount of all convertible notes with variable conversion rates outstanding at June 30, 2020 is $4,224,826, of which $163,826
are past maturity.
On
May 20, 2020, the Company entered into modification and forbearance agreements (the “agreements”) with three investors
as a condition for the execution of the equity line purchase agreement (see note 6), collectively totaling $4,397,000 in principal
and approximately $1,080,000 in accrued interest. The terms of the agreements include the extension of the maturity date, elimination
of the conversion feature attached to the hybrid instrument and a 12.5% premium for future cash redemption. The conversion feature
and the cash premium only take effect upon the effectiveness of the registration statement underlying the shares related to the
equity line purchase agreement, which did not occur as of June 30, 2020. On July 16, 2020, the Securities and Exchange Commission
declared effective the registration statement on Form S-1, which was filed on June 23, 2020 and amended on July 10, 2020. Management
reviewed the guidance per ASC 470-60 Troubled debt restructurings and ASC 470-50 Debt-Modifications and Extinguishments
and concluded that the terms of the agreements were not substantially different as of June 30, 2020 and accounted for the
transaction as a debt modification.
Notes
payable to a related party in the aggregate amount of $152,000 were outstanding at June 30, 2020 which are past maturity date.
The notes bear interest between 10% and 12% per annum. During the six months ended June 30, 2020, the Company paid $13,000 principal
to this related party.
As
of June 30, 2020, fixed rate notes payable outstanding totaled $1,860,903, of which $724,903 is past maturity.
|
|
June 30,
2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Notes payable at beginning of period
|
|
$
|
6,874,795
|
|
|
$
|
8,158,198
|
|
Notes payable issued
|
|
|
717,918
|
|
|
|
2,101,000
|
|
Loan fees added to note payable
|
|
|
82,082
|
|
|
|
91,250
|
|
Repayments of notes payable in cash
|
|
|
(13,000
|
)
|
|
|
(235,000
|
)
|
Less amounts converted to redeemable notes
|
|
|
-
|
|
|
|
(67,500
|
)
|
Less amounts exchanged to fixed rate notes
|
|
|
(283,000
|
)
|
|
|
-
|
|
Less amounts converted to stock
|
|
|
(1,141,066
|
)
|
|
|
(3,173,153
|
)
|
Notes payable at end of period
|
|
|
6,237,729
|
|
|
|
6,874,795
|
|
Less debt discount
|
|
|
(31,638
|
)
|
|
|
(12,649
|
)
|
|
|
$
|
6,206,091
|
|
|
$
|
6,862,146
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued to related parties
|
|
$
|
152,000
|
|
|
$
|
165,000
|
|
Notes payable issued to non-related party
|
|
$
|
6,054,091
|
|
|
$
|
6,697,146
|
|
The
maturity dates on the notes-payable are as follows:
|
|
Notes to
|
|
|
|
|
12 months ending,
|
|
Related parties
|
|
|
Non-related parties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Past due
|
|
$
|
152,000
|
|
|
$
|
888,729
|
|
|
$
|
1,040,729
|
|
June 30, 2021
|
|
|
-
|
|
|
|
5,197,000
|
|
|
|
5,197,000
|
|
|
|
$
|
152,000
|
|
|
$
|
6,085,729
|
|
|
$
|
6,237,729
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
7 - Shareholders’ Deficit
Preferred
Stock
The
Company has authorized 5,000,000 shares of preferred stock which have been designated as follows:
|
|
Number of Shares
|
|
|
Number of Shares Outstanding
|
|
|
Par
|
|
|
Liquidation
|
|
|
|
Authorized
|
|
|
at June 30, 2020
|
|
|
Value
|
|
|
Value
|
|
Series AA
|
|
|
1,000,000
|
|
|
|
25,000
|
|
|
$
|
0.0010
|
|
|
$
|
-
|
|
Preferred Series B
|
|
|
50,000
|
|
|
|
600
|
|
|
$
|
0.0001
|
|
|
$
|
100
|
|
Preferred Series C
|
|
|
8,000
|
|
|
|
719
|
|
|
$
|
0.0001
|
|
|
$
|
1,000
|
|
Preferred Series D
|
|
|
20,000
|
|
|
|
305
|
|
|
$
|
0.0001
|
|
|
$
|
1,000
|
|
Undesignated
|
|
|
3,922,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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 $0.001 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 Stockholders will receive no dividends
nor any value on liquidation. As of June 30, 2020, there were 25,000 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, 2020, 600 shares of Series B are outstanding.
Series
C Convertible 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. Management
determined that the Series C should be classified as liability per the guidance in ASC 480 Distinguishing Liabilities from Equity
as of December 31, 2019. On January 29, 2020, the Company filed the amended and restated certificate of designation fort its Series
C Secured Redeemable Preferred Stock. The amendment changed the rights of the Series C by (a) removing the requirement to redeem
the Series C, (b) removing the obligation to pay dividends on the Series C, (c) Allowing the holders of shares of Series C to
convert the stated value of their shares into common stock of the Company at 75% of the closing price of such common stock on
the day prior to the conversion. The C Preferred does not have any rights to vote with the common stock.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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.
Management
reviewed the guidance in ASC 470-60 Troubled Debt Restructurings and ASC 470-50 Debt-Modifications and Extinguishments
and concluded that the changes to the terms of the Series C qualified for debt extinguishment and recorded a loss on debt extinguishment
totaling approximately $604,000 for the six months ended June 30, 2020.
Management
determined the fair value of the new instrument based on the guidance in ASC 820 Fair Value Measurement. Management concluded
that the preferred stock should not be classified as a liability per the guidance in ASC 480 Distinguishing Liabilities from Equity
even though the conversion would require the issuance of variable number of shares since such obligation is not unconditional.
Management classified the Series C in permanent equity as of June 30, 2020.
During
the six months ended June 30, 2020, the Company converted 1,041 shares of Series C into 2,621,488 shares of common stock. As of
June 30, 2020, there are 719 shares of Series C outstanding.
Series
D Convertible Preferred Stock
On
November 11, 2019, the Company filed a certificate of designation for 20,000 shares of Series D Convertible Preferred Stock designated
as Series D (“Series D”), which are authorized and convertible, at the option of the holder, at any time from the
date of issuance, into shares of common shares. On or prior to August 1, 2020, for each share of Series D, the holder, on conversion,
shall receive a number of common shares equal to 0.01% of the Company’s issued and outstanding shares on conversion date
and for conversion on or after August 2, 2020, the holder shall receive conversion shares as though the conversion date was August
1, 2020, with no further adjustments for issuances by the Company of common stock after August 1, 2020, except for stock split
or reverse stock splits of the common stock. Management classified the Series D in permanent equity as of June 30, 2020.
The
Series D holders have no voting rights. Upon liquidation, the holder of Series D, 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. During the six months ended June 30, 2020, 50 shares of Series D have been issued. As of June 30, 2020, there are
305 shares of Series D outstanding.
Common
Stock
On
December 31, 2018, we entered into a non-transferrable investment agreement whereby the investor committed to purchase up to $10,000,000
of our common stock, over the course of 36 months. The aggregate number of shares issuable by us and purchasable by the investor
under the investment agreement is 81,250. A registration statement for the sale of our common stock related to the investment
agreement went effective on February 11, 2019.
On
June 2, 2020, in accordance with its undertakings we removed from registration by means of a post-effective amendment all of the
securities being registered which remain unsold as the offering has been terminated. The shares removed from registration include
all remaining shares under the Equity Purchase Agreement. As adjusted for a subsequent 1,000 for 1 reverse stock split, 15,390
shares were sold under the Registration Statement and 65,860 shares remain unsold. The issuer is withdrawing the 65,860 shares
from registration because the issuer does not intend to sell any further shares under the Registration Statement. SEC Notice of
Effectiveness was received on June 8, 2020.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
On
May 18, 2020, the Company and Cavalry Fund I LP (the “investor”) entered into an Equity Line Purchase Agreement (“ELPA”)
pursuant to which the investor committed to purchase, subject to certain restrictions and conditions, up to $10,000,000 (the “Commitment”)
worth of the Company’s common stock, over a period of 24 months from the effectiveness of the registration statement registering
the resale of shares purchased by the investor pursuant to the ELPA.
The
Company agreed to issue shares of its common stock (the “commitment shares”) to the investor having a market value
of 5% of the commitment ($500,000 and 3,859,630 shares) based on the market price of the shares at the execution of the ELPA to
be delivered in three tranches of 385,963 shares on: (i) the execution of the ELPA; (ii) thirty days after the effectiveness of
the registration statement to be filed under the RRA (the “registration right agreement” or the “registration
statement”), and (iii) 90 trading days after the effectiveness of the registration statement with the balance of the commitment
shares to be issued pro-rata over the first $3,000,000 of puts in accordance with a formula set forth in the ELPA.
The
ELPA provides that at any time after the effective date of the registration statement and provided the closing sale price of the
common shares on the OTCQB is not below $0.01, from time to time on any business day selected by the Company (the “Purchase
Date”), the Company shall have the right, but not the obligation, to direct the investor to buy up to 300,000 shares of
the common stock (the “regular purchase amount”) at a purchase price equal to the lower of: (i) the lowest applicable
sales price on the date of the put and (ii) 85% of the arithmetic average of the 3 lowest closing prices for the common stock
during the 10 consecutive trading days ending on the trading day immediately preceding such put date. The regular purchase amount
may be increased as follows: to up to 400,000 shares of common stock if the closing price of the common shares is not below $0.25
per share and up to 500,000 shares if the closing price is not below $0.40 per share.
Under
the ELPA the Company has the right to submit a regular purchase notice to the investor as often as every business day. The payment
for the shares covered by each put notice will generally occur on the day following the put notice. The ELPA contains provisions
which allow for the Company to make additional puts beyond the regular purchase amount at greater discounts to the market price
of the common stock as forth in the ELPA.
The
ELPA requires the Company to apply at least 50% of the proceeds of puts to the payment of certain variable rate convertible notes
issued by the Company.
During
the six months ended June 30, 2020, pursuant to the execution of the ELPA, the Company issued 385,963 shares of common stock with
a value of $55,540.
During
the six months ended June 30, 2020, the Company issued 7,741,335 shares of common stock for the conversion of notes and accrued
interest in the amount of $1,311,240.
During
the six months ended June 30, 2020, the Company issued 2,621,488 shares of common stock with a value of $1,387,600, related to
the conversion of Series C.
During
the six months ended June 30, 2020, the Company issued 58,428 shares of common stock to Series C with a value of $8,152 to induce
the holders to convert into shares of common stock.
During
the six months ended June 30, 2020, the Company issued 25,000 shares of common stock with a value of $3,500 related to services.
During
the six months ended June 30, 2020, the Company issued 409,000 shares with a value of $58,855 to one investor to exchange one
variable convertible note with remaining principal of $283,000 past maturity for a fixed rate convertible note with principal
of $525,000 and maturing one year from issuance. The Company recorded a loss on debt extinguishment of $151,496 for the fair value
of the shares issued in accordance with guidance in ASC 470-50 Debt-Modifications and Extinguishments.
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.
During
the six months ended June 30, 2019, we issued 4,400 shares of common stock in exchange for $61,106 cash pursuant to the Investment
Agreement.
During
the six months ended June 30, 2019, the Company issued 286,404 shares of common stock for the conversion of notes and accrued
interest in the amount of $2,387,841.
During
the six months ended June 30, 2019, the Company issued 443 shares of common stock valued at $8,333 related to the extension of
outstanding notes.
During
the six months ended June 30, 2019, the Company issued 7,157 shares of common stock with a value of $129,897 related to services.
During
the six months ended June 30, 2019, the Company issued 1,091,000 shares of common stock with a value of $26,545 as additional
consideration for the issuance of two promissory notes totaling $336,000.
Stock
Options
The
balance of all stock options outstanding as of June 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Term (years)
|
|
|
Value
|
|
Outstanding at January 1, 2020
|
|
|
|
99,833
|
|
|
$
|
27.81
|
|
|
|
2.02
|
|
|
|
-
|
|
Granted
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
(3,300
|
)
|
|
$
|
11.60
|
|
|
|
3.25
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2020
|
|
|
|
96,533
|
|
|
$
|
28.36
|
|
|
|
1.46
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2020
|
|
|
|
96,533
|
|
|
$
|
28.36
|
|
|
|
1.46
|
|
|
$
|
-
|
|
On
June 11, 2020, the Board of Directors approved the issuance of 74,668,000 non-incentive stock options to officers, directors,
and key consultants. The key terms and conditions of the award have not been mutually understood and agreed upon, and as a result,
the Company has not recognized stock compensation for such award for the six months ended June 30, 2020.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Warrants
A
summary of the status of the warrants granted under these agreements at June 30, 2020, and changes during the six months then
ended is presented below:
|
|
|
Outstanding Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Term (years)
|
|
Outstanding at January 1, 2020
|
|
|
|
73,486
|
|
|
$
|
306.28
|
|
|
|
1.37
|
|
Granted
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
(2,408
|
)
|
|
$
|
37.89
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
|
71,078
|
|
|
$
|
315.38
|
|
|
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2020
|
|
|
|
71,078
|
|
|
$
|
315.38
|
|
|
|
0.91
|
|
The
Company measures the fair value of stock options and warrants issued using the Black Scholes option pricing model using the following
assumptions:
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
-
|
|
|
|
2
years
|
|
Exercise price
|
|
|
-
|
|
|
|
$14.50-$27.90
|
|
Expected volatility
|
|
|
-
|
|
|
|
199%-242%
|
|
Expected dividends
|
|
|
-
|
|
|
|
None
|
|
Risk-free interest rate
|
|
|
-
|
|
|
|
2.28% to 2.60%
|
|
Forfeitures
|
|
|
-
|
|
|
|
None
|
|
Note
8 – Related Party Transactions
One
former executive of the Company has entered into note payable agreements with the Company. The balance of notes payable from the
related party at June 30, 2020 is $152,000. The notes bear interest at between 10%-12% per annum and initially matured on June
30, 2019. On September 29, 2019, the Company extended the maturity on all outstanding notes to December 31, 2019. During the six
months ended June 30, 2020, the Company paid $13,000 principal to this related party.
As
of June 30, 2020, and December 31, 2019, the balance of executives’ deferred compensation is $1,044,475 and $914,853, respectively,
of which, $632,257 is related to deferred compensation owed to a former executive of the Company.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
9 – 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,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
1 month
|
|
|
|
1
month - 1 year
|
|
Exercise price
|
|
|
$0.06-$0.75
|
|
|
|
$6.20-$12.90
|
|
Expected volatility
|
|
|
157%-249%
|
|
|
|
134%-161%
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
Risk-free interest rate
|
|
|
0.03% to 1.54%
|
|
|
|
1.91%
to 2.87%
|
|
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.
The
following table presents changes in the liabilities with significant unobservable inputs (level 3) for the three months ended
June 30, 2020:
|
|
Derivative
|
|
|
|
Liability
|
|
Balance December 31, 2019
|
|
$
|
10,599,690
|
|
|
|
|
|
|
Issuance of convertible debt
|
|
|
524,742
|
|
Extinguishment following note exchange
|
|
|
(151,496
|
)
|
Settlements by debt settlement
|
|
|
(1,705,743
|
)
|
Change in estimated fair value
|
|
|
(5,600,255
|
)
|
|
|
|
|
|
Balance June 30, 2020
|
|
$
|
3,666,938
|
|
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 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.
The
following table presents balances in the liabilities with significant unobservable inputs (Level 3) at June 30, 2020:
|
|
Fair
Value Measurements Using
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,666,938
|
|
|
$
|
3,666,938
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,666,938
|
|
|
$
|
3,666,938
|
|
Note
10 – Commitments and Contingencies
Legal
Matters
On May 17, 2020, the
Company received a letter (the “Letter”) from an attorney representing Auctus Fund, LLC (“Auctus”), a
lender to the Company, which claimed that a convertible promissory note in the original principal amount of $275,250 (the “Note”)
was “in default”. The Letter, among other things, threatened litigation against the Company and its officers for damages
and liquidated damages. On July 23, 2020, the Company was served with a complaint by Auctus filed in the United States District
Court for the District of Massachusetts alleging breach of contract and various other theories for recovery and damages. The Company
has filed an answer to the complaint and alleged various counterclaims against Auctus. The case in an early stage and the Company
intends to vigorously defend against Auctus claims and to pursue its counterclaims against Auctus.
The
Company may become involved in various legal proceedings in the normal course of business.
Note
11 – Concentrations
Sales
During
the six months ended June 30, 2020, we had two significant customers which accounted for 36% and 20% of sales.
Supplier
We
also have a single source for our bioelectric medical devices, which account for 100% of our sales. The interruption of products
provided by this supplier would adversely affect our business and financial condition unless an alternative source of products
could be found.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Accounts
Receivable
At
June 30, 2020, we had two customer which accounted for 100% of our account receivable balances.
Note
12 – Subsequent Events
Subsequent
to June 30, 2020, an aggregate of 611,090 shares of common stock were issued on the conversion of $26,200 of principal
and $6,768 of accrued interest pursuant to Variable Notes.
Subsequent
to June 30, 2020, the Company issued 1,500,000 shares of common stock in exchange for 34,690 previously issued stock options.
Subsequent
to June 30, 2020, the Company issued 500,000 shares of common stock as inducement for extension of a note with one investor.
Subsequent
to June 30, 2020, the Company issued 1,234,568 shares of common stock at a purchase price of $0.081 for total consideration
of $100,000 to one investor.
On
July 16, 2020, the Securities and Exchange Commission declared effective the registration statement on Form S-1, which was filed
on June 23, 2020 and amended on July 10, 2020 following the execution on May 18, 2020 of the equity line purchase agreement.
Subsequent to June 30, 2020,
pursuant to the Equity Line Purchase Agreement, the Company issued 385,963 shares of common stock.
As
a result of these issuances, the total number of common shares outstanding is 16,662,039, Preferred B shares outstanding
is 600, Preferred C shares outstanding is 719 and Preferred D shares outstanding is 305.