UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

   
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2016.
   
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from _______ to _______.

 

Commission File Number: 333-176954

 

 

ENDONOVO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   45-2552528
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

6320 Canoga Avenue, 15th Floor, Woodland Hills, CA 91367

(Address of principal executive offices, zip code)

 

(800) 489-4774

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
     
 

Non-accelerated filer [  ]

(do not check if smaller reporting company)

Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of November 11, 2016, there were 127,252,298 shares of common stock, $0.0001 par value issued and outstanding.

 

   
 

 

ENDONOVO THERAPEUTICS, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

September 30, 2016

 

    Page Number
PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements. 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 19
Item 4. Controls and Procedures. 19
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings. 20
Item 1A. Risk Factors. 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 20
Item 3. Defaults Upon Senior Securities. 21
Item 4. Mine Safety Disclosures 21
Item 5. Other Information. 21
Item 6. Exhibits. 21
     
SIGNATURES 22

 

  2 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Endonovo Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   September 30, 2016   December 31, 2015 
   (Unaudited)   (Audited) 
         
ASSETS          
Current assets:          
Cash  $94,675   $41,473 
Other current assets   150,000    336,233 
Total current assets   244,675    377,706 
           
Property, Plant and Equipment, net   19,781    31,657 
           
   $264,456   $409,363 
           
LIABILITIES AND SHAREHOLDERS' DEFICIT          
Current Liabilities          
Accounts payable and accrued expenses  $4,551,289   $3,990,185 
Short term advances, related parties   3,823    3,605 
Notes payable, net of discounts of $794,520 as of September 30, 2016 and $321,961 as of December 31, 2015   1,376,204    1,261,790 
Notes payable - related parties   170,000    245,000 
Derivative liability   2,175,152    3,973,542 
Current portion of long term loan   12,303    12,031 
           
Total current liabilities   8,288,771    9,486,153 
           
Notes payable, net of discounts of $235,242 as of September 30, 2016 and $477,346 of December 31, 2015   332,258    27,654 
Long term loan   7,355    16,616 
Acquisition payable   155,000    155,000 
Total liabilities   8,783,384    9,685,423 
COMMITMENTS AND CONTINGENCIES          
Shareholders' deficit          
Super AA super voting preferred stock, $0.0001 par value; 1,000,000 authorized and 1,000 issued and outstanding   -    - 
Common stock, $.0001 par value; 250,000,000 shares authorized; 124,766,871 and 104,803,401 shares issued and outstanding as of September 30, 2016 and December 31, 2015   12,475    10,479 
Additional paid-in capital   9,104,619    3,773,642 
Stock subscriptions   (1,570)   (1,570)
Accumulated deficit   (17,634,452)   (13,058,611)
Total shareholders' deficit   (8,518,928)   (9,276,060)
   $264,456   $409,363 

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

  3 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statement of Operations

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
                 
Revenues, net  $-   $(400)  $-   $4,265 
Cost of goods sold   -    -    -    2,162 
Gross profit   -    (400)   -    2,103 
                     
Operating expenses   1,310,748    469,475    4,778,109    1,317,070 
Loss from operations   (1,310,748)   (469,875)   (4,778,109)   (1,314,967)
                     
Other income (expense)                    
Change in fair value of derivative liability   46,997    (100,384)   2,645,681    (70,938)
Gain (loss) on extinguishment of debt   (42,507)   (363,049)   (435,625)   (363,049)
Interest expense, net   (912,583)   (347,729)   (2,007,788)   (489,736)
    (908,093)   (811,162)   202,268    (923,723)
                     
Loss before income taxes   (2,218,841)   (1,281,037)   (4,575,841)   (2,238,690)
                     
Provision for income taxes   -    -    -    - 
                     
Net loss  $(2,218,841)  $(1,281,037)  $(4,575,841)  $(2,238,690)
                     
Basic and diluted loss per share  $(0.02)  $(0.01)  $(0.04)  $(0.02)
Weighted average common share outstanding:                    
Basic and diluted   123,138,397    100,955,870    113,649,351    94,651,544 

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

  4 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

 

   Nine Months ended September 30, 
   2016   2015 
Operating activities:          
Net loss  $(4,575,841)  $(2,238,690)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation and amortization expense   11,876    10,920 
Fair value of equity issued for services   2,402,736    5,521 
Gain on extinguishment of debt   545,905    363,049 
Non-cash interest expense   779,045    241,945 
Non-cash operating expenses on fees paid   106,720    - 
Amortization of note discount   826,063    71,846 
Change in fair value of derivative liability   (2,645,681)   70,938 
Changes in assets and liabilities:          
Other current assets   196,133    (595)
Accounts payable and accrued expenses   549,360    667,021 
Net cash used in operating activities   (1,803,684)   (808,045)
           
Investing activities:          
Net cash used in investing activities   -    - 
           
Financing activities:          
Proceeds from the issuance of notes payable   1,051,228    711,250 
Proceeds from issuance of notes payable- related parties   -    50,000 
Proceeds from short term advances   5,618    84,950 
Repayments on short term advances   (15,300)   (85,850)
Proceeds from issuance of common stock and units   1,055,829    81,960 
Payment against long term loan   (8,989)   (7,774)
Payment against notes payable   (156,500)   - 
Payment against notes payable- related parties   (75,000)   - 
Net cash provided by financing activities   1,856,886    834,536 
           
Net increase in cash   53,202    26,491 
Cash, beginning of year   41,473    988 
Cash, end of period  $94,675   $27,479 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $25,486   $21,639 
Cash paid for income taxes  $-   $500 
           
Non Cash Investing and Financing Activities:          
Conversion of notes payable and accrued interest to common stock  $532,018   $428,138 

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

  5 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Deficit

(Unaudited)

 

   Series AA Preferred Stock   Common Stock   AdditionalPaid-in   Common  Stock
Subscription
   Retained   TotalShareholder's 
   Shares   Amount   Shares   Amount   Capital   Receivable   Earnings   Deficit 
                                 
Balance December 31, 2015   1,000   $-    104,803,401   $10,479   $3,773,642   $(1,570)  $(13,058,611)  $(9,276,060)
                                         
Shares issued for cash   -    -    566,327    57    107,022    -    -    107,079 
Private placement units issued for cash   -    -    4,793,287    479    948,271    -    -    948,750 
Shares issued for services   -    -    9,346,760    935    2,290,438    -    -    2,291,373 
Shares issued with notes payable extensions and lock-up agreement   -    -    264,117    26    111,337    -    -    111,363 
Shares issued for conversion of notes payable and accrued interest   -    -    3,934,279    393    1,539,648    -    -    1,540,041 
                                         
Private placement units issued for conversion of notes payable and accrued interest   -    -    1,058,700    106    294,261    -    -    294,367 
                                         
Warrants issued with notes payable   -    -    -    -    40,000    -    -    40,000 
                                         
Net loss for the period ended September 30, 2016   -    -    -    -    -    -    (4,575,841)   (4,575,841)
Balance September 30, 2016   1,000   $-    124,766,871   $12,475   $9,104,619   $(1,570)  $(17,634,452)  $(8,518,928)

 

See accompanying summary of accounting polices and notes to unaudited condensed consolidated financial statements.

 

  6 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

Note 1 - Organization and Nature of Business

 

Endonovo Therapeutics, Inc. and Subsidiaries (the “Company” or “ETI”) is primarily focused in the business of biomedical research and development, particularly in regenerative medicine, which has included the development of its proprietary square wave form device. The Company has historically been involved with intellectual property licensing and commercialization.

 

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, 2016 and 2015 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 results of operations for the period presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year.

 

The consolidated financial statements of the Company include the accounts of ETI and IPR as of March 14, 2012; Aviva as of April 2, 2013; and WeHealAnimals as of November 16, 2013. All significant intercompany accounts and transactions are eliminated in consolidation.

 

Going Concern

 

These accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for a period following the date of these consolidated financial statements. The Company has raised approximately $2.1 million in debt and equity financing for the period January 1, 2016 to September 30, 2016. The Company is raising additional capital through debt and equity securities in order to continue the funding of its operations. However, there is no assurance that the Company can raise enough funds or generate sufficient revenues to pay its obligations as they become due, which raises substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying value of assets or liabilities as a result of this uncertainty. To reduce the risk of not being able to continue as a going concern, management has initiated a private placement offering to raise capital through the sale of its common stock and is seeking out profitable companies. Although, uncertainty exists as to whether the Company will be able to generate enough cash from operations to fund the Company’s working capital needs or raise sufficient capital to meet the Company’s obligations as they become due, no adjustments have been made to the carrying value of assets or liabilities as a result of this uncertainty.

 

Net Income (Loss) per Share

 

For the nine month period ending September 30, 2016, the Company had 7,861,475 of weighted average common shares relating to the convertible debt, under the if-converted method, however, these shares are not dilutive because the Company recorded a loss during this nine month period.

 

Recent Accounting Standard Updates

 

The Company is not aware of any recently issued accounting pronouncements that when adopted will have a material effect on the Company’s financial position or results of its operations.

 

  7 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

Note 2 – Property, Plant and Equipment

 

The following is a summary of equipment, at cost, less accumulated depreciation at September 30, 2016 and December 31, 2015:

 

   September 30, 2016   December 31, 2015 
         
Autos  $64,458   $64,458 
Medical equipment   5,000    5,000 
Other equipment   8,774    8,774 
    78,232    78,232 
Less accumulated depreciation   58,451    46,575 
   $19,781   $31,657 

 

Depreciation expense for the nine months ended September 30, 2016 and 2015 was $11,876 and $10,920, respectively. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon the sale, retirement or disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss recorded to the consolidated statements of operations.

 

Note 3 - Notes Payable and Long Term Loan

 

Notes Payable

 

During the nine months ended September 30, 2016, the Company issued, including the two notes discussed below related to the $1,000,000 financing, nine Convertible Notes (“Variable Notes”) with original terms ranging from one year to one year and nine months with interest rates ranging from an add-on interest equal to 10% of the initial principal to annual interest rates of 6% or 10%, and a variable conversion rate with a discounts ranging from 25% to 37% of the Company’s common stock based on the terms included in the Variable Notes. Some of the Variable Notes contain a prepayment option, which enables the Company to prepay the note for a period of 0-180 days subsequent to issuance at a premium of 125%. In addition, 300,000 warrants were issued with and to the holder of one of the Variable Notes. The gross amount of Variable Notes outstanding is $1,662,888 as of September 30, 2016.

 

In July 2016, the Company entered into a $1,000,000 financing comprising a Note Securities Purchase Agreement (NSPA”) and a form of note to be issued by us on funding. The notes will be purchased at a 5.5% original issue discount, bear interest at 6% per annum, are convertible into our common stock at a 25% discount to our lowest trading price for the 20 days prior to the conversion. The holder will not affect any conversion which will result in its holding more than 4.99% of our common stock and has agreed to limit the sales of our stock to 22.5% of the trading volume on the date of sale unless the trading volume exceeds $130,000 on a day, in which case the applicable trading volume limitation will be 30%. The form of note provides for certain penalties for failure to timely deliver stock and contains other protective provisions for the holder. The note will be funded in full in three tranches. As of September 30, 2016, two tranches amounting to $600,000 principal of the NSPA has been funded and the final tranche will be funded upon the effectiveness of a registration statement covering the shares of our common stock issuable upon conversion of the notes. The registration statement became effective subsequent to September 30, 2016.

 

  8 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

   September 30, 2016   December 31, 2015 
         
Notes payable at beginning of period  $2,333,751   $1,377,416 
Notes payable issued   1,304,231    1,586,250 
Repayments of notes payable in cash   (231,500)   (138,000)
Less amounts converted to equity   (498,258)   (491,915)
Notes payable at end of period   2,908,224    2,333,751 
Less debt discount   (1,029,762)   (799,307)
   $1,878,462   $1,534,444 
           
Notes payable issued to related parties  $170,000   $245,000 
Notes payable issued to non-related parties  $1,708,462   $1,289,444 

 

The maturity dates on the notes payable are as follows: 

 

   Notes to     
12 months ending,  Related parties   Non-related parties   Total 
             
September 30, 2017  $170,000   $1,376,204   $1,546,204 
September 30, 2018  $-   $332,258   $332,258 
   $170,000   $1,708,462   $1,878,462 
                
Current notes payable  $170,000   $1,376,204   $1,546,204 
Long term notes payable  $-   $332,258   $332,258 

 

Derivative Liability

 

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 valuation model using the following assumptions:

 

  9 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

    Three months ended September 30,    Nine months ended September 30, 
    2016    2015    2016    2015 
                     
Expected term   1 month - 1 year    9 months - 3 years    1 month - 2.2 years    9 months - 3 years 
Exercise price   $0.069-$0.1051    $0.03-$0.31    $0.0648-$0.28    $0.03-$0.52 
Expected volatility   255%-276    175%-193%    220%-276%    138%-193% 
Expected dividends   None    None    None    None 
Risk-free interest rate   0.52% to 0.59%    0.25% to 0.40%    0.45% to 1.06%    0.25%-0.40% 
Forfeitures   None    None    None    None 

 

The time period over which the Company will be required to evaluate the fair value of the conversion feature is nine to twenty-four months or conversion.

 

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.

 

As of September 30, 2016 and December 31, 2015, the balances of the Derivative Liability are as follows:

 

   Derivative 
   Liability 
Balance December 31, 2015  $3,973,542 
      
Issuance of convertible debt   2,015,501 
Settlements by debt extinguishment   (1,168,210)
Change in estimated fair value   (2,645,681)
      
Balance September 30, 2016  $2,175,152 

 

  10 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

Long Term Loan

 

The Company has financed the purchase of an automobile. The maturity dates on the loan are as follows:

 

Twelve months ending,    
September 30, 2017  $12,303 
September 30, 2018  $7,355 
   $19,658 
      
Current portion  $12,303 
Long term portion  $7,355 

 

Note 4 - Shareholders’ Deficit

 

Common Stock

 

The Company has entered into consulting agreements with various consultants for service to be provided to the Company. The agreements stipulate a monthly fee and a certain number of shares that the consultant vests in over the term of the contract. The consultant is issued a prorated number of shares of common stock at the beginning of the contract, which the consultant earns over a three-month period. At the anniversary of each quarter, the consultant is issued a new allotment of common stock during the first 3 years of engagement. In accordance with ASC 505-50 – Equity-Based Payment to Non-Employees, the common stock shares issued to the consultant are valued upon their vesting, with interim estimates of value as appropriate during the vesting period. During the nine months ended September 30, 2016, the Company issued 2,250,000 shares of common stock with a value of $880,800 related to these consulting agreements.

 

During the nine months ended September 30, 2016, the Company also issued 7,096,760 shares of common stock with a value of $1,410,573 for additional services and fees.

 

During the nine months ended September 30, 2016, the Company issued pursuant to a private placement offering 5,851,987 shares of common stock and the same number of warrants for cash of $948,750 and conversion of notes and accrued interest in the amount of $294,367. The Company also issued 566,327 shares of common stock for cash of $107,079 and 3,934,279 shares of common stock for the conversion of notes and accrued interest in the amount of $1,540,041.

 

Also, during the nine months ended September 30, 2016, the Company issued 264,117 shares of common stock valued at $111,363 related to the extension of outstanding notes and lock-up agreements.

 

Equity Line of Credit

 

In July 2016, the Company entered into a $9,000,000 Equity Line pursuant to an Equity Line Securities Purchase Agreement (“ELSPA”) which provides for a 3% origination fee and requires the investor to purchase shares of our stock which we will put to the investor at a price equal to 75% of the lowest bid price for our stock during the 10 trading days preceding the put notice. Our draw downs, or puts, have a minimum amount of $25,000 and a maximum amount of $500,000 and can be no more than 300% of the average trading volume of our stock during the ten day pricing period of the put. The investor is not required to accept any put which will result in their becoming a holder of more than 4.99% of our outstanding stock and its resales are subject to the same volume limitations as resales of our stock issued on conversion of the notes. As a result of the restrictions and limitations on our right to put our shares to the investor, we cannot give any assurance as to whether we will be able to raise $9,000,000 under the ELSPA. The ELSPA has a term of 36 months, commencing thirty days after the effective date of the final Registration Statement, or when BCLP has purchased $9,000,0000 of our stock, whichever is earlier. The Registration Statement went effective subsequent to September 30, 2016.

 

  11 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

Series AA Preferred Shares

 

On February 22, 2013, the Board of Directors of the Company authorized an amendment to the Company’s Articles of Incorporation, as amended (the “Articles of Incorporation”), in the form of a Certificate of Designation that authorized the issuance of up to one million (1,000,000) shares of a new series of preferred stock, par value $0.0001 per share, designated “Series AA Super Voting Preferred Stock,” for which the board of directors established the rights, preferences and limitations thereof.

 

Each holder of outstanding shares of Series AA Super Voting Preferred Stock shall be entitled to one hundred thousand (100,000) votes for each share of Series AA Super Voting Preferred Stock held on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company. As of September 30, 2016, there were 1,000 shares of Series AA Preferred stock outstanding.

 

Warrants

 

During the nine months ended September 30, 2016, in conjunction with the sale of common stock and issuance of notes, the Company issued two and five-year common stock purchase warrants to acquire up to 6,151,977 shares of common stock. These warrants have exercise prices ranging from $0.195 to $0.90 per share. The balance of all warrants outstanding as of September 30, 2016 is as follows:

 

    Outstanding Warrants 
        Weighted Average 
        Exercise Price 
     Shares    Per Share 
Outstanding at January 1, 2016    -   $- 
Granted    6,151,977   $0.44 
Cancelled    -   $- 
Exercised    -   $- 
Outstanding at September 30, 2016    6,151,977   $0.44 
            
Exercisable at September 30, 2016    6,151,977   $0.44 

 

Note 5 – Related Party Transactions

 

Two officers and executives of the Company have entered into note payable agreements with the Company. $74,000 of principal has been repaid during the nine months ended September 30, 2016. The balance of notes payable from related parties at September 30, 2016 is $170,000.

 

Note 6 – Fair Value Measurements

 

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.

 

  12 
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

The Company’s balance sheet contains derivative and warrant 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 Valuation Model was used to determine the fair value. The Company records derivative liability on the condensed consolidated balance sheets at fair value with changes in fair value recorded in the condensed consolidated statements of operation.

 

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the nine months ended September 30, 2016:

 

   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 September 30, 2016                    
Derivative liability  $ -  $-   $2,175,152   $2,175,152 
Total  $ - $-   $2,175,152   $2,175,152 

 

Note 7 – Subsequent Events

 

Subsequent to September 30, 2016, an aggregate of 525,000 shares of restricted common stock were issued for services.

 

Subsequent to September 30, 2016, the Company issued 1,388,675 shares of its restricted common stock and 1,388,675 Warrants pursuant to a Private Placement Memorandum and private offerings for $475,000.

 

Subsequent to September 30, 2016, an aggregate of 20,000 shares of restricted common stock were issued for Notes Payable.

 

Subsequent to September 30, 2016, an aggregate of 549,252 shares of restricted common stock were issued pursuant to Note Conversions of $58,557.

 

Subsequent to September 30, 2016, an aggregate of 2,500 shares of restricted common stock were issued pursuant to a leak out agreement.

 

As a result of these issuances the total number of shares outstanding is 127,252,298.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Notice Regarding Forward Looking Statements

 

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” and variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Overview

 

Endonovo Therapeutics, Inc. (the “Company” or “ETI”) operates in two business segments: (1) intellectual property licensing and commercialization; and (2) biomedical research and development which has included development of its proprietary square wave form device.

 

Our present primary focus is the development, patenting and regulatory approval of our biomedical proprietary technology.

 

Going Concern

 

Our independent registered auditors included an explanatory paragraph in their opinion on our consolidated financial statements as of and for the fiscal year ended December 31, 2015 that states that our ongoing losses and lack of resources causes substantial doubt about our ability to continue as a going concern.

 

Critical Accounting Policies and Estimates

 

We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.

 

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Use of estimates

 

In the opinion of management, the accompanying condensed consolidated balance sheets and related interim statements of operations, cash flows, and shareholders’ deficits include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. The significant estimates were made for the fair value of common stock issued for services, with notes payable arrangements in connection with note extension agreements, and as repayment for outstanding debts, in estimating the useful life used for depreciation and amortization of our long-lived assets, in the valuation of the derivative liability, and the valuation of deferred income tax assets. Actual results and outcomes may differ from management’s estimates and assumptions.

 

Revenue recognition

 

The Company recognizes revenue from its technology licensing and commercialization activities in accordance with paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned.

 

The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer and accepted by the customer as completed pursuant to Company’s Licensing Agreements, (iii) collectability is reasonably assured. The Company has yet to realize any revenues from its licensing agreements.

 

Recently Issued Accounting Pronouncements

 

The Company is not aware of any recently issued accounting pronouncements that when adopted will have a material effect on the Company’s financial position or result of its operations.

 

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Results of Operations

 

Three Months ended September 30, 2016 and 2015

 

   Three Months Ended
September 30,
   Favorable     
   2016   2015   (Unfavorable)   % 
                 
Revenue  $-   $(400)  $400    -100.0%
Cost of revenue   -    -    -    NM 
Gross profit   -    (400)   400    -100.0%
                     
Operating expenses   1,310,748    469,475    (841,273)   179.2%
                     
Loss from operations   (1,310,748)   (469,875)   (840,873)   179.0%
                     
Other income (expense)   (908,093)   (811,162)   (96,931)   11.9%
                     
Net loss  $(2,218,841)  $(1,281,037)  $(937,804)   73.2%

 

Revenues

 

We had no revenue for the three months ended September 30, 2016 compared to a refund of $400 for the three months ended September 30, 2015. We are in an early stage and our revenues will be small and null until a device or biological license receives FDA approval or international research licensing develops. The growth of our business is dependent on successfully raising additional capital to fund our growth.

 

Operating Expenses

 

Our operating expenses for the three months ended September 30, 2016 were approximately $1,310,748 compared to $469,475 for the corresponding period of the previous year. The operating expenses were comprised primarily from consulting and professional fees for the development of our intellectual property and expenses related to being a public company. A significant portion of these fees were paid for with the issuance of restricted shares of common stock. During the three months ended September 30, 2016, 4,513,514 shares of common stock were issued for consulting services valued at $663,519 as compared to 1,270,000 shares of common stock being issued for consulting services valued at $1,270, during the corresponding period of the previous year.

 

Other Income (Expense)

 

Other income (expense) for the quarter ended September 30, 2016 was expense of $908,093 compared to expense of $811,162 for the quarter ended September 30, 2015. This change was due primarily to a change in valuation of our derivative liabilities and net of interest expense resulting from the amortization of the discounts on notes payable. In addition, we incurred a loss on extinguishment of debt of $42,507 for debt conversions and settlements during the quarter ended September 30, 2016 compared to a loss of $363,049 during the quarter ended September 30, 2015. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluation of these derivative liabilities.

 

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Nine months ended September 30, 2016 and 2015

 

   Nine Months Ended
September 30,
   Favorable     
   2016   2015   (Unfavorable)   % 
                 
Revenue  $-   $4,265   $(4,265)   -100.0%
Cost of revenue   -    2,162    2,162    100.0%
Gross profit   -    2,103    (2,103)   -100.0%
                     
Operating expenses   4,778,109    1,317,070    3,461,039    262.8%
                     
Loss from operations   (4,778,109)   (1,314,967)   (3,463,142)   -263.4%
                     
Other income (expense)   202,268    (923,723)   1,125,991    121.9%
                     
Net loss  $(4,575,841)  $(2,238,690)  $(2,337,151)   -104.4%

 

Revenues

 

We had no revenue for the nine months ended September 30, 2016 compared to $4,265 for the nine months ended September 30, 2015. We are in an early stage and our revenues will be small and null until a device or biological license receives FDA approval or international research licensing develops. The growth of our business is dependent on successfully raising additional capital to fund our growth.

 

Operating Expenses

 

Our operating expenses for the nine months ended September 30, 2016 were approximately $4,778,109 compared to $1,317,070 for the corresponding period of the previous year. The operating expenses were comprised primarily from consulting and professional fees for the development of our intellectual property and expenses related to being a public company. A significant portion of these fees were paid for with the issuance of restricted shares of common stock. During the nine months ended September 30, 2016, 9,346,760 shares of common stock were issued for consulting services valued at $2,291,373 as compared to 5,519,286 shares of common stock being issued for consulting services valued at $5,521, during the corresponding period of the previous year.

 

Other Income (Expense)

 

Other income (expense) for the nine months ended September 30, 2016 was income of $202,268 compared to expense of $923,723 for the nine months ended September 30, 2015. This change was due primarily to a change in valuation of our derivative liabilities and net of interest expense resulting from the amortization of the discounts on notes payable. In addition, we incurred interest expense on the issuance of debt and a loss on extinguishment of debt for debt conversions and settlements during the nine months ended September 30, 2016 and 2015. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluation of these derivative liabilities.

 

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Liquidity and Capital Resources

 

   As of   Increase 
   September 30, 2016   December 31, 2015   (Decrease) 
Working Capital               
                
Current assets  $244,675   $377,706   $(133,031)
Current liabilities   8,288,771    9,486,153    1,197,382 
Working capital deficit  $(8,044,096)  $(9,108,447)  $1,064,351 
                
Long-term debt  $494,613   $199,270   $295,343 
                
Stockholders' deficit  $(8,518,928)  $(9,276,060)  $(757,132)

 

   Nine Months Ended September 30,   Increase 
   2016   2015   (Decrease) 
Statements of Cash Flows Select Information            
             
Net cash provided (used) by:               
Operating activities  $(1,794,684)  $(808,045)  $(986,639)
Investing activities   $-   $-   $- 
Financing activities   $1,847,886   $834,536   $1,013,350 

 

   As of   Increase 
   September 30, 2016   December 31, 2015   (Decrease) 
Balance Sheet Select Information               
                
Cash   $94,675   $41,473   $53,202 
                
Accounts payable and accrued expenses   $4,560,289   $3,990,185   $570,104 

 

Since inception and through September 30, 2016, the Company has raised approximately $5.0 million in equity and debt transactions. These funds have been used to commence the operations of the Company to acquire and begin the development of its intellectual property portfolio. These activities include attending trade shows and corporate development. Our 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 of these condensed consolidated financial statements. The Company has incurred substantial losses since inception. Its current liabilities exceed its current assets and available cash is not sufficient to fund expected future operations. The Company is raising additional capital through debt and equity securities in order to continue the funding of its operations. However, there is no assurance that the Company can raise enough funds or generate sufficient revenues to pay its obligations as they become due, which raises substantial doubt about our ability to continue as a going concern. To reduce the risk of not being able to continue as a going concern, management is increasing the value of its intellectual property through regulatory approvals and obtaining additional patent rights and has initiated a private placement offering to raise capital through the sale of its common stock. Although, uncertainty exists as to whether the Company will be able generate enough cash from operations to fund the Company’s working capital needs or raise sufficient capital to meet the Company’s obligations as they become due, no adjustments have been made to the carrying value of assets or liabilities as a result of this uncertainty. Our cash on hand at September 30, 2016 was approximately $94,675. This will be insufficient to fund operations if additional capital is not raised. The Company raised an aggregate of approximately $2.2 million through the sale of equity and debt securities during the nine months ended September 30, 2016.

 

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The Company is not aware of any recently issued accounting pronouncements that when adopted will have a material effect on the Company’s financial position or result of its operation.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

Disclosure of controls and procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

As required by the SEC Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

 

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following two material weaknesses which have caused management to conclude that as of September 30, 2016 our disclosure controls and procedures were not effective at the reasonable assurance level:

 

  19 
 

 

1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the quarter ended September 30, 2016. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

Changes in internal controls over financial reporting.

 

There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. Notwithstanding the foregoing, several lenders have commenced litigation against us, which is in the early stages. We anticipate that these matters will be settled, however, if a settlement cannot be reached, we will vigorously defend these matters and we do not believe that there will be any material adverse effect as a result thereof, but there is always uncertainty in any litigation and a result cannot be guaranteed.

 

Item 1A. Risk Factors.

 

We are a Smaller Reporting Company (as defined in Rule 12b-2 of the Exchange Act) and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Number of        
Common Shares   Source of    
Issued   Payment  Amount 
4,513,514   Services  $663,518 
4,200   Note extension  $588 
2,006,666   Cash  $237,500 
341,834   Conversion of notes  $48,787 

 

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The above issuances of securities during the three months ended September 30, 2016 were exempt from registration pursuant to Section 4(2), and/or Regulation D promulgated under the Securities Act. These securities qualified for exemption under Section 4(2) of the Securities Act since the issuance securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these stockholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

Exhibit Number   Exhibit Title
     
31.1   Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS *   XBRL Instance Document
     
101.SCH *   XBRL Taxonomy Schema
     
101.CAL *   XBRL Taxonomy Calculation Linkbase
     
101.DEF *   XBRL Taxonomy Definition Linkbase
     
101.LAB *   XBRL Taxonomy Label Linkbase
     
101.PRE *   XBRL Taxonomy Presentation Linkbase
     
In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

 

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 14, 2016 Endonovo Therapeutics, Inc.
     
  By: /s/ Alan Collier
    Alan Collier
   

Chief Executive Officer

(Duly Authorized Officer, Principal Executive Officer and Principal Financial Officer)

 

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