ETBI Eastgate Biotech Corporation (CE)

Notes to the Unaudited Consolidated Financial Statements

  For the six months ended June 30, 2017 and 2016

Interim Unaudited Consolidated Financial Statements

The unaudited interim consolidated financial statements of Eastgate Biotech Corporation (the “ Company, ” “ Eastgate, ” “ we, ” “ our ” or “ us ” ) as of June 30, 2017 and for the six-month periods ended June 30, 2017 and 2016 contained in this Quarterly Report (collectively, the “ Unaudited Interim Consolidated Financial Statements ” ) were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for all periods presented. The results of operations for the six-month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year.

The accompanying Unaudited Interim Consolidated Financial Statements have been prepared in accordance with the regulations for interim financial information of the Securities and Exchange Commission (the “ SEC ” ). Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements.  In the opinion of management, the unaudited accompanying statements of financial condition and related interim statements of operations, cash flows, and stockholders ’ deficit include all adjustments (which consist only of normal and recurring adjustments) considered necessary for a fair presentation in conformity with U.S. GAAP. These Unaudited Interim Consolidated Financial Statements should be read in conjunction with our consolidated financial statements as of and for the year ended December 31, 2016.

2.     Organization and Nature of Operations

Organization

Eastgate Biotech Corp. (The Company) was organized on September 8, 1999, under the laws of the State of

Nevada.

During the year ended December 31, 2012 the Company acquired Eastgate Pharmaceuticals Inc. ( “ EPI ” ), as a wholly-owned subsidiary of the Company, from our CEO, Anna Gluskin, its sole shareholder, officer, and director.   EPI is a Province of Ontario, Canada corporation.   

On March 31, 2017, the Company acquired Omni Age Management and Surgery Center ( “ Omni ” ) as a wholly-owned subsidiary of the Company.  The Company acquired the name and operating assets of Omni from a creditor who had foreclosed on Omni in a bankruptcy proceeding.

Nature of Business

The Company is engaged in the research and development of drug delivery innovations, development of improved and novel formulations, and forms of alternative dosage delivery of existing biologically active molecules.

We are primarily engaged in the development of novel formulations of natural compounds and pharmaceutical products. We intend to accomplish this by developing our proprietary self-emulsifying drug delivery systems, predominantly forming Nano-emulsions. Although we have not finalized any pharmaceuticals products and are in the early stages of research, our goal is to be able to develop patentable and Trade Secret formulations of pharmaceutical, nutraceutical dietary supplements and consumer health products. We recently started marketing and distribution and have limited sales for some of our nutraceuticals products.

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Some of our proposed products under development are based on existing natural compounds. Many of these proposed products are made of essential oils and plant extracts. Our proposed products comprise excipients listed in the FDA “ Inactive Ingredients Guide ” that we believe are safe and approved for human consumption. Additionally, we believe that these proposed products can be manufactured using common equipment. We anticipate that we will be able to apply self-emulsifying technologies for development of a variety of pharmaceuticals and natural products for different applications.

3.     Going Concern

These accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of June 30, 2017, the Company had an accumulated deficit of $16,297,925 and negative working capital of $4,869,593.  The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities, obtain the necessary debt or equity financing, and generating profitable operations from the Company ’ s future operations. However, there can be no assurance that these arrangements will be sufficient to fund its ongoing capital expenditures, working capital, and other cash requirements. The outcome of these matters cannot be predicted at this time. These factors raise substantial doubt regarding the Company ’ s ability to continue as a going concern. These accompanying unaudited consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The financial statements of the Company have been prepared in accordance with US GAAP and are expressed in U.S. dollars. All inter-company accounts and transactions have been eliminated. The Company ’ s fiscal year end is December 31.

a)   Use of Estimates

The preparation of unaudited consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company ’ s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

b)  Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Eastgate Pharmaceuticals, Inc.  All significant inter-company transactions are eliminated.

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c)   Cash and Cash Equivalents

For purposes of the statement of cash flows, cash includes demand deposits, saving accounts and money market accounts. The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents.

d)   Accounts receivable and concentration of credit risk

The Company carries no accounts receivable for the periods reported herein.  This has currently eliminated the risk of default in the collection of accounts receivable.  In addition, our concentration risk, which is evaluated on a quarterly basis is currently, virtually nil.

e)   Allowance for doubtful accounts

The allowance for doubtful accounts is based on the Company ’ s assessment of the collectability of customer accounts and the aging of the accounts receivable.  The Company regularly reviews the adequacy of the Company ’ s allowance for doubtful accounts through identification of specific receivables where it is expected that payments will not be received.  The Company also establishes an unallocated reserve that is applied to all amounts that are not specifically identified.  In determining specific receivables where collections may not have been received, the Company reviews past due receivables and gives consideration to prior collection history and changes in the customer ’ s overall business condition.  The allowance for doubtful accounts reflects the Company ’ s best estimate as of the reporting dates.

At June 30, 2017 and December 31, 2016, the Company had an allowance for bad debts in the amount of $0 and $0, respectively.

f)   Basic and Diluted Net Loss per Share

The Company computes net loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share ( “ EPS ” ) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

g)   Financial Instruments

Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument ’ s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

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Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company did not have any Level 2 or Level 3 assets or liabilities as of September 30, 2017, with the exception of its notes payable. The carrying amounts of these liabilities at September 30, 2017 approximate their respective fair value based on the Company ’ s incremental borrowing rate.

Cash is considered to be highly liquid and easily tradable as of June 30, 2017 and therefore classified as Level 1 within our fair value hierarchy.

In addition, FASB ASC 825-10-25 Fair Value Option, or ASC 825-10-25, was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments

h)   Income Taxes

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740 “ Accounting for Income Taxes ” as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in this financial statement because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

i) Revenue Recognition

The Company recognizes revenue in accordance with ASC-605, “ Revenue Recognition, ” which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or title has passed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.

Revenues are recognized (a) for larger construction type projects based on the percentage of completion method; or (b) for direct sales of products, upon shipment, provided that a signed purchase order has been received, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, and there are no remaining significant obligations. Reserves for sales returns and allowances, based on historical levels of returns and discounts, current economic trends and changes in customer demand.  

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Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

j) Reclassification

Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no effect on reported net loss.

Notes Payable to Related Parties :

The Company owed $2,081,837 and $2,066,165 in notes and accrued interest to an officer and director at June 30, 2017 and December 31, 2016, respectively.  

During the six months ended June 30, 2017 and 2016, the Company made no repayments of notes or accrued interest.  

Notes Payable, others:

The Company has notes due to unrelated parties totaling $160,632 and $0 at June 30, 2017 and December 31, 2016, respectively.

As part of the acquisition of Omni, the Company acquired a note due to a former shareholder of Omni in the amount of $845,000.  As of June 30, 2017, the Company had converted approximately $298,000 of the note into common stock.  

At June 30, 2017 and December 31, 2016, the Company has accrued interest of $54,894 and $0, respectively.

The Company owes accrued compensation totaling $2,391,150 and $2,095,891 to two officers at June 30, 2017 and December 31, 2016, respectively.   

During the six months ended June 30, 2017 and 2016, the Company made repayments of accrued compensation of $361,000 and $0, respectively.  

As of December 31, 2016, $107,069 of the Company ’ s accounts payable are owed to two formerly related parties.

Deferred income tax assets as of December 31, 2016 of $3,126,500 resulting from net operating losses and future amortization deductions, have been fully offset by valuation allowances.  The valuation allowances have been established equal to the full amounts of the deferred tax assets, as the Company is not assured that it is more likely than not that these benefits will be realized.

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Reconciliation between the statutory United States corporate income tax rate (21%) and the effective income tax rates based on continuing operations is as follows:

Components of deferred tax assets were approximately as follows:

At June 30, 2017, the Company has available net operating losses of approximately $13,145,000 which may be carried forward to apply against future taxable income. These losses will expire in 2035. Deferred tax assets related to these losses have not been recorded due to uncertainty regarding their utilization.

The provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the Company ’ s financial statements. The Company ’ s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.

The Company has not filed its applicable Federal and State tax returns for the year ended December 31, 2012, 2013, and 2014 and may be subject to penalties for noncompliance. The Company has filed an extension for the 2015 filing.

 As a result of stock issuances in 2017 and 2016, the future utilization of the Company ’ s net operating losses is likely limited pursuant to Internal Revenue Code section 382.  The deferred tax asset derived from these tax loss carry-forwards have been included in consolidated deferred tax assets - net operating loss carry-forwards, and a full valuation allowance has been established since it is not more likely than not that such benefits will be recovered.

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9.     Stockholders ’ Equity

Authorized

Authorized capital stock consists of:

· 4 50,000,000 shares of common stock with a par value of $0.0 0 001 per share; and

50,000,000 preferred shares with a par value of $0.00001 per share

b) Share Issuances

During the period ended June 30, 2017, the Company issued the following common shares:

In January 2017, the Company issued 1,000,000 shares of common stock at an average price of $0.0318 per share (the share price at the time of issuance) to consultants who are also accredited investors.

In February 2017, the Company issued 8,100,000 shares of common stock at an average price of $0.0399 per share (the share price at the time of issuance) to consultants who are also accredited investors.    

In March 2017, the Company issued 3,000,000 shares of common stock at an average price of $0.04 per share (the share price at the time of issuance) to consultants who are also accredited investors.    

In March 2017, the Company issued 500,000 shares of common stock at an average price of $0.043 per share (the share price at the time of issuance) to consultants who are also accredited investors.    

In April 2017, the Company issued 55,000,000 shares of common stock at an average price of $0.0057 per share to a firm resolving debt of the Company under a 3(a)10 filing.  

In April 2017, the Company issued 100,000 shares of common stock at an average price of $0.043 per share (the share price at the time of issuance) to consultants who are also accredited investors.    

In May 2017, the Company issued 89,973,200 shares of common stock at an average price of $0.0023 per share to a firm resolving debt of the Company under a 3(a)10 filing.  

In May 2017, the Company issued 5,250,000 shares of common stock at an average price of $0.0019 per share (the share price at the time of issuance) to consultants who are also accredited investors.

In June 2017, the Company issued 48,267,000 shares of common stock at an average price of $0.0011 per share to a firm resolving debt of the Company under a 3(a)10 filing.  

In June 2017, the Company issued 562,333,333 shares of common stock at an average price of $0.0002 per share (the share price at the time of issuance) to consultants who are also accredited investors.

In June 2017, the Company issued 25,000,000 shares of common stock at an average price of $0.0018 per share (the share price at the time of issuance) to a debt holder who also is an accredited investor.

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10.     Commitments and Contingencies

Litigation

The Company may, from time to time, become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings that it believes will have, individually or in the aggregate, a material adverse effect on its business. 

On March 31, 2017, Eastgate Biotech entered into a series of transactions to acquire the assets of Omni Surgery and Skin Rejuvenation ( “ Omni ” ) a Saskatchewan corporation.  

Omni was in default on various notes to banks and lenders, one of which William Abajian ( “ Abajian ” ) had a security interest in the equipment of the company in support of a loan in the amount of $845,000.  Abajian foreclosed on the assets.  Subsequently, Eastgate acquired the foreclosed assets of Omni from Abajian in exchange for the assumption of the $845,000 note, and simultaneously, the acquisition from Abajian and a second shareholder, 99% of the equity in Omni.  

Eastgate entered into a second agreement with Abajian to directly acquire his $845,000 note and security interest in the assets in exchange for the issuance of 20,000,000 common shares of Eastgate.  Abajian can redeem the shares back to the Company in amounts not to exceed 2.0 million shares per year.  In addition, Abajian holds a security interest to the 99% equity interest Eastgate holds in Omni until such time as his Eastgate shares are fully redeemed.  As of the date of this filing, the balance due to Abajian is $547,000.  

We have evaluated subsequent events through the date of issuance of the unaudited consolidated financial statements, and below are the material recognizable subsequent events.

In October 2017, the Company issued 13,000,000 shares of common stock to consultants in exchange for their services.  The shares were issued at the market price on the date of issuance.

In June 2017, the Company issued 15,000,000 shares of common stock at an average price of $0.0003 per share to a firm resolving debt of the Company under a 3(a)10 filing.  

In June 2017, the Company issued 562,333,333 shares of common stock at an average price of $0.0002 per share (the share price at the time of issuance) to consultants who are also accredited investors.

In January 2018, the Company issued 5,000,000 shares of common stock to consultants in exchange for their services.  The shares were issued at the market price on the date of issuance.

In April 2018, the Company issued 7,500,000 shares of common stock to consultants in exchange for their services.  The shares were issued at the market price on the date of issuance.

In June 2018, the Company issued 275,000,000 shares of common stock to consultants in exchange for their services.  The shares were issued at the market price on the date of issuance.

In July 2018, the Company issued 42,000,000 shares of common stock to consultants in exchange for their services.  The shares were issued at the market price on the date of issuance.

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In August 2018, the Company issued 555,000,000 shares of common stock to employees in payment of accrued pay and as bonuses for their services.  The shares were issued at the market price on the date of issuance.

In September 2018, the Company issued 9,000,000 shares of common stock to consultants in exchange for their services.  The shares were issued at the market price of $0.009 per share.  

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