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® therapeutics 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 plain and edema, and has
CMS National Coverage for the treatment of chronic wounds. The Company’s current portfolio of pre-clinical stage Electroceutical®
therapeutics 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.
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 September 30, 2021, and 2020, 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 13, 2021. 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.
Liquidity
and Going Concern
The
Company’s unaudited condensed consolidated financial statements are prepared using GAAP applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing
source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable.
As
of September 30, 2021, the Company had cash of approximately $6,000 and a working capital deficiency of approximately $20.2 million.
During the nine months ended September 30, 2021, the Company used approximately $0.6 million of cash in its operation. The Company has
incurred recurring losses resulting in an accumulated deficit of approximately $58.8 million as of September 30, 2021. 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 nine months ended September 30, 2021, the Company has raised approximately $0.6 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 common
stock, and the issuance of convertible promissory notes.
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)
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.
Securities that are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been
antidilutive for the nine months ended September 30, 2021, include stock options, warrants, and notes payable. The Company has 3,013,730
options and 26,115 warrants to purchase common stock outstanding at September 30, 2021. The Company has 96,533 options and 56,914 warrants
to purchase common stock outstanding at September 30, 2020.
The
components of basic and diluted earnings per share for the nine months ended September 30, 2021, and 2020 were as follows:
Schedule of Earnings (Loss) Per Share
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(5,501,224
|
)
|
|
$
|
1,634,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
Convertible
notes
|
|
|
-
|
|
|
|
(5,063,936
|
)
|
|
Net
loss for diluted earnings per share
|
|
$
|
(5,501,224
|
)
|
|
$
|
(3,429,210
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding during the period
|
|
|
55,303,026
|
|
|
|
9,621,530
|
|
|
Dilutive
effect of convertible notes payable
|
|
|
-
|
|
|
|
13,953,850
|
|
|
Common
stock and common stock equivalents used for diluted earnings per share
|
|
|
55,303,026
|
|
|
|
23,575,380
|
|
Accounts
Receivable
The
Company uses the specific identification method for recording the provision for doubtful accounts, which was $0
as of
September 30, 2021, and December 31, 2020. Account receivables 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 $0
and $3,283
for the nine months ended September 30, 2021,
and 2020, 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
Accounting
Principles Not Yet Adopted
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications
and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s
Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified
written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim
periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of ASU
2021-04 guidance on the Company’s financial position, results of operations and cash flows.
Newly Adopted Accounting
Principles
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt-Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the
number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results
in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments
that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related
to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting
and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. In addition,
ASU 2020-06 amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based
accounting conclusions. The Amendments also affects the diluted EPS calculation for instruments that may be settled in cash or shares
and for convertible instruments. The amendments are effective for public entities excluding smaller reporting companies for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted,
but no earlier than fiscal years beginning after December 15, 2020, including interim periods. The Company adopted the new standard update
on January 1, 2021, which did not result in a material impact on
the Company’s condensed consolidated results of operations, financial position, and cash flows.
In
December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes. The objective of this standard update is to simplify the accounting for
income taxes by removing certain exceptions to the general principles in Topic 740. This ASU also attempts to improve consistent application
of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This standard update is effective
for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this ASU
effective January 1, 2021, and the impact of adoption was not material to the Company’s financial position, results of operations
and cash flows.
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
The
Company 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.
The
Company 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. The Company’s 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. The Company identified 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. The Company 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, the Company has an unconditional right to receive payment. The Company’s 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, the Company reviews 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, the Company considers whether the Company acts 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
The
Company has identified the following revenues by revenue source:
|
|
1.
|
Medical
care providers
|
As
of September 30, 2021, and 2020, the sources of revenue were as follows:
Schedule of Source of Revenue
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
sales- Medical care providers, gross
|
|
$
|
7,790
|
|
|
$
|
39,980
|
|
|
$
|
72,789
|
|
|
$
|
154,296
|
|
|
Total
sources of revenue
|
|
$
|
7,790
|
|
|
$
|
39,980
|
|
|
$
|
72,789
|
|
|
$
|
154,296
|
|
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 shipment 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 September 30, 2021, and December 31, 2020:
Summary of Property, Plant and Equipment
|
|
|
September
30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Autos
|
|
$
|
64,458
|
|
|
$
|
64,458
|
|
|
Medical
equipment
|
|
|
13,969
|
|
|
|
13,969
|
|
|
Other
equipment
|
|
|
11,367
|
|
|
|
11,367
|
|
|
Property,
Plant and Equipment, gross
|
|
|
89,794
|
|
|
|
89,794
|
|
|
Less
accumulated depreciation
|
|
|
89,794
|
|
|
|
88,214
|
|
|
Property,
Plant and Equipment, net
|
|
$
|
-
|
|
|
$
|
1,580
|
|
Depreciation
expense for the nine months ended September 30, 2021, and 2020 was $1,580 and $3,432, respectively.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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 September 30, 2021, and December 31, 2020:
Schedule
of Patents
|
|
|
September 30,
2021
|
|
|
December
31,
2020
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated amortization
|
|
|
2,425,916
|
|
|
|
1,940,732
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents,
net
|
|
$
|
2,074,084
|
|
|
$
|
2,559,268
|
|
Amortization
expense associated with patents was $485,184 for the nine months ended September 30, 2021, and 2020.
The estimated future amortization
expense related to patents as of September 30, 2021, is as follows:
Schedule of Estimated Future Amortization Expense
|
Twelve
Months Ending September 30,
|
|
Amount
|
|
|
|
|
|
|
|
2021
|
|
$
|
646,910
|
|
|
2022
|
|
|
646,910
|
|
|
2023
|
|
|
646,910
|
|
|
2024
|
|
|
133,354
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,074,084
|
|
Note
6- Notes Payable
Notes
Payable
During
the nine months ended September 30, 2021, the Company issued five (5) fixed rate promissory notes totaling $475,000 for funding of $475,000
with original terms of twelve months and interest rates of 15%. The holders of the promissory notes can convert the outstanding unpaid
principal and accrued interest at a fixed conversion rate, subject to standard anti-dilution features.
During
the nine months ended September 30, 2021, the Company amended the terms of two of its promissory notes to accelerate the conversion feature
and amend the conversion price of the instruments. The Company recorded the modification in accordance with ASC 470-50 Debt-Modifications
and Extinguishments and recorded $58,407 as loss from debt extinguishment in the condensed consolidated statements of operations.
During
the nine months ended September 30, 2021, the Company settled one of its promissory notes by issuing 1,515,152 restricted shares of the
Company’s common stock with a fifteen percent (15%) make-whole provision. The Company recorded a gain on debt extinguishment of
approximately $128,000.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
During
the nine months ended September 30, 2021, the Company paid $3,000 in cash for one of its fixed rate promissory notes.
During
the nine months ended September 30, 2021, the Company converted $358,443 in principal and $99,892 in accrued but unpaid interest into
25,690,651 shares of common stock.
The
gross amount of all convertible notes with variable conversion rates outstanding as of September 30, 2021 is $4,770,926,
of which $2,660,476
are past maturity.
Notes
payable to a former related party in the aggregate amount of $132,600
were outstanding at September 30, 2021, which
are past maturity date. The notes bear interest between 10%
and 12%
per annum. During the nine months ended September 30, 2021, the Company paid $10,400
in principal to this former related party.
As
of September 30, 2021, fixed rate notes payable outstanding totaled $1,292,154, of which $85,154 is past maturity.
Schedule of Notes Payable
|
|
|
September
30,
2021
|
|
|
December
31,
2020
|
|
|
|
|
|
|
|
|
|
|
Notes
payable at beginning of period
|
|
$
|
6,835,196
|
|
|
$
|
6,874,795
|
|
|
Notes
payable issued
|
|
|
475,000
|
|
|
|
1,364,611
|
|
|
Liquidated
damages
|
|
|
-
|
|
|
|
452,095
|
|
|
Note
modification
|
|
|
-
|
|
|
|
25,190
|
|
|
Loan
fees added to note payable
|
|
|
-
|
|
|
|
120,389
|
|
|
Repayments
of notes payable in cash
|
|
|
(13,400
|
)
|
|
|
(22,000
|
)
|
|
Settlements
on note payable
|
|
|
(117,770
|
)
|
|
|
(697,253
|
)
|
|
Less
amounts converted to stock
|
|
|
(358,443
|
)
|
|
|
(1,282,631
|
)
|
|
Notes
payable at end of period
|
|
|
6,820,583
|
|
|
|
6,835,196
|
|
|
Less
debt discount
|
|
|
(48,927
|
)
|
|
|
(201,157
|
)
|
|
|
|
$
|
6,771,656
|
|
|
$
|
6,634,039
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable issued to a former related party
|
|
$
|
132,600
|
|
|
$
|
143,000
|
|
|
Notes
payable issued to non-related parties
|
|
$
|
6,639,056
|
|
|
$
|
6,491,039
|
|
The
maturity dates on the notes-payable are as follows:
Schedule of Maturity Dates of Notes Payable
|
|
|
Notes
to
|
|
|
|
|
|
12
months ending,
|
|
Former
Related party
|
|
|
Non-related
parties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
due
|
|
$
|
132,600
|
|
|
$
|
3,370,533
|
|
|
$
|
3,503,133
|
|
|
September
30, 2022
|
|
|
-
|
|
|
|
3,317,450
|
|
|
|
3,317,450
|
|
|
|
|
$
|
132,600
|
|
|
$
|
6,687,983
|
|
|
$
|
6,820,583
|
|
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:
Schedule
of Preferred Stock
|
|
|
Number
of
|
|
|
Number
of Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
Shares
Authorized
|
|
|
at
September 30, 2021
|
|
|
Par
Value
|
|
|
Liquidation
Value
|
|
|
Series
AA
|
|
|
1,000,000
|
|
|
|
25,000
|
|
|
$
|
0.0010
|
|
|
$
|
-
|
|
|
Preferred
Series B
|
|
|
50,000
|
|
|
|
600
|
|
|
$
|
0.0001
|
|
|
$
|
100
|
|
|
Preferred
Series C
|
|
|
8,000
|
|
|
|
738
|
|
|
$
|
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 September 30, 2021, 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 September 30, 2021, 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.
During
the nine months ended September 30, 2021, and 2020, the Company converted 25 and 1,051 shares of Series C into 1,111,111 and 2,754,822
shares of common stock. As of September 30, 2021, there are 738 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 September 30, 2021.
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.
The Company did not issue any shares of Series D in the nine months ended September 30, 2021. As of September 30, 2021, there are 305
shares of Series D outstanding.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Common
Stock
Equity
Purchase Line Agreement
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. The Company does not anticipate that it will raise any funds under the ELPA.
Activity
during the nine months ended September 30, 2021
During
the nine months ended September 30, 2021, the Company issued 25,690,651 shares of common stock for the conversion of principal notes
and accrued interest in the amount of $458,335.
During
the nine months ended September 30, 2021, the Company issued 4,333,668 shares of common stock labeled as commitment shares in connection
with the issuance of promissory notes.
During
the nine months ended September 30, 2021, the Company issued 7,000,000 shares of common stock pursuant to securities purchase agreement
for total consideration of $126,000.
During
the nine months ended September 30, 2021, the Company issued 1,111,111 shares of common stock with a value of $33,333, related to the
conversion of Series C.
During
the nine months ended September 30, 2021, the Company issued 4,020,986 shares of common stock with a value of $142,424, related to the
settlement of debts, of which 2,505,834 shares of common stock were issued with a fair value of $84,697 to a former related party.
During
the nine months ended September 30, 2021, the Company issued 2,500,000 shares of common stock in connection with the consulting agreement.
Activity
during the nine months ended September 30, 2020
During
the nine months ended September 30, 2020, pursuant to the execution of the ELPA, the Company issued 771,926 shares of common stock with
a value of $97,918.
During
the nine months ended September 30, 2020, the Company issued 8,501,004 shares of common stock for the conversion of notes and accrued
interest in the amount of $1,381,650.
During
the nine months ended September 30, 2020, the Company issued 2,754,822 shares of common stock with a value of $1,400,934, related to
the conversion of Series C.
During
the nine months ended September 30, 2020, the Company issued 58,428
shares of common stock to Series C with a value of $8,152
to convert into shares of common stock.
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
During
the nine months ended September 30, 2020, the Company issued 385,000 shares of common stock with a value of $39,500 related to services.
During
the nine months ended September 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.
During
the nine months ended September 30, 2020, the Company issued 1,234,568 shares of common stock in exchange for $100,000 cash pursuant
to the Securities Purchase Agreement.
During
the nine months ended September 30, 2020, the Company issued 1,500,000 shares of common stock for total value of $165,000 in exchange
for 34,690 stock options regarding the ambiguity of price adjustment in the event of a reverse split that the Company completed on December
20, 2019.
During
the nine months ended September 30, 2020, the Company modified the terms of its promissory note with one investor, which extended the
maturity date of its promissory note and the issuance of 500,000
restricted stock with a fair value of $55,000.
The recording of this transaction resulted in a loss on debt extinguishment of $55,000
per ASC 470-60 Troubled Debt Restructurings.
Stock
Options
The
balance of all stock options outstanding as of September 30, 2021, is as follows:
Schedule of Stock Options Outstanding
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Per
Share
|
|
|
Term
(years)
|
|
|
Value
|
|
|
Outstanding
at January 1, 2021
|
|
|
3,014,080
|
|
|
$
|
0.37
|
|
|
|
1.67
|
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
(350
|
)
|
|
$
|
47.00
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at September 30, 2021
|
|
|
3,013,730
|
|
|
$
|
0.37
|
|
|
|
0.92
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2021
|
|
|
1,263,730
|
|
|
$
|
0.67
|
|
|
|
0.95
|
|
|
$
|
-
|
|
Share-based
compensation expense for the nine months ended September 30, 2021, totaled approximately $61,000.
The
total unrecognized compensation expense amounts to approximately $137,000 and should be recognized evenly over 1.65 years.
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 nine months ended September 30, 2021.
Warrants
A
summary of the status of the warrants granted under these agreements at September 30, 2021, and changes during the nine months then ended
is presented below:
Schedule of Warrants Outstanding
|
|
|
Outstanding
Warrants
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average Remaining
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Term
(years)
|
|
|
Outstanding
at January 1, 2021
|
|
|
39,295
|
|
|
$
|
200.72
|
|
|
|
0.93
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
(13,180
|
)
|
|
$
|
449.15
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Outstanding
at September 30, 2021
|
|
|
26,115
|
|
|
$
|
76.76
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2021
|
|
|
26,115
|
|
|
$
|
76.76
|
|
|
|
0.51
|
|
Endonovo
Therapeutics, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Note
8 – Related Party and former related parties Transactions.
One
executive officer of the Company has agreed to defer a portion of his compensation until cash flow improves. As of September 30, 2021,
the balance of the deferred compensation was $443,289, which reflects $225,000 accrual of deferred compensation and approximately $119,179
cash repayment of deferred compensation during the nine months ended September 30, 2021.
One
former executive of the Company has agreed to defer a portion of his compensation until cash flow improves. As of September 30, 2021,
the balance of his deferred compensation was $632,257. No activity occurred during the nine months ended September 30, 2021.
From
time-to-time officer of the Company advance monies to the Company to cover costs. The balance of short-term advances due to one officer
of the Company at September 30, 2021, was $6,529 and is included in the Company’s accounts payable balance as of September 30,
2021. During the nine months ended September 30, 2021, the Company’s executive officer advanced an aggregate amount of $13,405
for corporate expenses and notes repayment, of which $13,405 was repaid back as of September 30, 2021.
As
of September 30, 2021, notes payable remain outstanding to the former
President of the Company, in the amount of $132,600.
As of September 30, 2021, accrued interests on these notes payable totaled $64,852,
and are included in accrued expenses on the condensed consolidated balance sheet.
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:
Schedule of Conversion Feature Using Black Scholes Option Pricing Model
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term
|
|
|
1
– 4 months
|
|
|
|
1
– 6 months
|
|
|
Exercise price
|
|
|
$0.012-$0.030
|
|
|
|
$0.05-$0.76
|
|
|
Expected
volatility
|
|
|
177%-206%
|
|
|
|
157%-249%
|
|
|
Expected
dividends
|
|
|
None
|
|
|
|
None
|
|
|
Risk-free
interest rate
|
|
|
0.06%
to 0.13%
|
|
|
|
0.03%
to 1.54%
|
|
|
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 nine months ended September
30, 2021:
Schedule of Fair Value of Derivative Liability
|
|
|
Derivative
|
|
|
|
|
Liability
|
|
|
Balance
December 31, 2020
|
|
$
|
4,202,597
|
|
|
|
|
|
|
|
|
Extinguishment
|
|
|
(133,386
|
)
|
|
Debt
conversion
|
|
|
(585,857
|
)
|
|
Change
in estimated fair value
|
|
|
2,962,795
|
|
|
|
|
|
|
|
|
Balance
September 30, 2021
|
|
$
|
6,446,149
|
|
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) as of September 30, 2021:
Schedule of Liabilities Significant Unobservable Inputs
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
Markets for
|
|
|
|
Significant
Other
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
Assets
|
|
|
|
Observable
Inputs
|
|
|
|
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
|
(Level
1)
|
|
|
|
(Level
2)
|
|
|
|
(Level
3)
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,446,149
|
|
|
$
|
6,446,149
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,446,149
|
|
|
$
|
6,446,149
|
|
Note
10 – Commitments and Contingencies
Legal
Matters
The
Company is a defendant in a case brought by Auctus Fund, LLC seeking to enforce a variable rate convertible note dated in August
2019, which was in the original amount of $275,250
and claiming damages in excess of $500,000,
including other unspecified damages and attorney fees. The Company is vigorously defending the action and has filed an
answer with counterclaims. While the matter is in its early stages and there are always uncertainties in litigation, management does
not believe that the litigation will have a result significantly adverse to the Company. As of September 30, 2021, the balance
of the variable rate convertible note is approximately $164,000, excluding approximately $31,000 in accrued interest.
The
Company is subject to certain legal proceedings, which it considers routine to its business activities. As of September 30, 2021, the
Company believes, after consultation with legal counsel, that the ultimate outcome of such legal proceedings, whether individually or
in the aggregate, is not likely to have a material adverse effect on the Company’s financial position, results of operations or
liquidity.
Note
11 – Concentrations.
Sales
During
the nine months ended September 30, 2021, we had two significant customers, which accounted for approximately 61%
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
September 30, 2021, we had one customer which accounted for approximately 64% of our account receivable balances.
Note
12 – Subsequent Events
Subsequent
to September 30, 2021, an aggregate of 1,770,656
shares of restricted common stock were issued
on the conversion of $35,153
of principal and $260
of accrued interest pursuant to fixed promissory
notes.
Subsequent
to September 30, 2021, the Company executed two convertible notes for aggregate principal of $175,000,
carrying coupon of 15%,
with due date one year from issuance date, convertible six months from issuance date at a fixed conversion rate.
Subsequent
to September 30, 2021, the Company agreed to issue 1,225,000
commitment shares pursuant to securities
purchase agreement executed in conjunction with the two convertible notes executed post September 30, 2021.
The
Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued
to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events
to be disclosed besides those noted above.