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, 2017.

 

[  ] 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: 000-55453

 

 

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]
  Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [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 3, 2017, there were 3,274,764 shares of common stock, $0.0001 par value issued and outstanding.

 

 

 

 
 

 

ENDONOVO THERAPEUTICS, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

September 30, 2017

 

 

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. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 22
Item 4. Controls and Procedures. 22
     
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings. 23
Item 1A. Risk Factors. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 24
Item 3. Defaults Upon Senior Securities. 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information. 24
Item 6. Exhibits. 24
     
SIGNATURES 25

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Endonovo Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   September 30,   December 31, 
   2017   2016 
   (Unaudited)   (Audited) 
         
ASSETS          
Current assets:          
Cash  $64,479   $55,533 
Prepaid expenses and other current assets   91,000    247,321 
Total current assets   155,479    302,854 
           
Property Plant and Equipment, net   4,754    15,825 
           
Total assets  $160,233   $318,679 
           
LIABILITIES AND SHAREHOLDERS' DEFICIT          
Current Liabilities          
Accounts payable and accrued expenses  $3,238,237   $4,727,247 
Short term advances   6,973    5,823 
Notes payable, net of discounts of $920,773 as of September 30, 2017 and $1,145,849 as of December 31, 2016   2,549,445    1,878,107 
Notes payable - related parties   170,000    170,000 
Derivative liability   7,217,059    1,927,752 
Current portion of long term loan   7,355    12,395 
           
Total current liabilities   13,189,069    8,721,324 
           
Long term loan   -    4,221 
Acquisition payable   155,000    155,000 
Total liabilities   13,344,069    8,880,545 
COMMITMENTS AND CONTINGENCIES          
Shareholders' deficit          
Super AA super voting preferred stock, $0.001 par value; 1,000,000 authorized and 5,000 and 1,000 issued and outstanding at September 30, 2017 and December 31, 2016   5    - 
Series B convertible preferred stock, $0.0001 par value; 50,000 shares authorized, 0 shares issued and outstanding at September 30, 2017 and December 31, 2016   -    - 
Common stock, $.0001 par value; 500,000,000 shares authorized; 284,063,508 and 134,336,637 shares issued and outstanding as of September 30, 2017 and December 31, 2016   28,404    13,434 
Additional paid-in capital   17,755,199    9,800,553 
Stock subscriptions   (14,070)   (1,570)
Accumulated deficit   (30,953,374)   (18,374,283)
Total shareholders' deficit   (13,183,836)   (8,561,866)
Total liabilities and shareholders' deficit  $160,233   $318,679 

 

See accompanying summary of accounting policies 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, 
   2017   2016   2017   2016 
                 
Operating expenses  $1,035,628   $1,310,748   $3,770,929   $4,778,109 
Loss from operations   (1,035,628)   (1,310,748)   (3,770,929)   (4,778,109)
                     
Other income (expense)                    
Change in fair value of derivative liability   (4,544,656)   46,997    (6,945,434)   2,645,681 
Gain (loss) on extinguishment of debt   (58,197)   (42,507)   2,175,459    (435,625)
Settlement expense   (80,000)   -    (80,000)   - 
Interest expense, net   (953,623)   (912,583)   (3,958,187)   (2,007,788)
    (5,636,476)   (908,093)   (8,808,162)   202,268 
                     
Loss before income taxes   (6,672,104)   (2,218,841)   (12,579,091)   (4,575,841)
                     
Provision for income taxes   -    -    -    - 
                     
Net loss  $(6,672,104)  $(2,218,841)  $(12,579,091)  $(4,575,841)
                     
Basic and diluted loss per share  $(0.03)  $(0.02)  $(0.06)  $(0.04)
Weighted average common share outstanding:                    
Basic and diluted   263,535,090    123,138,397    220,353,026    113,649,351 

 

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, 
   2017   2016 
Operating activities:          
Net loss  $(12,579,091)  $(4,575,841)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation and amortization expense   11,070    11,876 
Fair value of equity issued for services   1,410,071    2,402,736 
Gain on extinguishment of debt   (2,175,459)   545,905 
Non-cash interest expense   2,465,912    779,045 
Non-cash operating expenses on fees paid   -    106,720 
Amortization of note discount   1,467,888    826,063 
Change in fair value of derivative liability   6,945,434    (2,645,681)
Changes in assets and liabilities:          
Other current assets   156,321    196,133 
Accounts payable and accrued expenses   108,658    549,360 
Net cash used in operating activities   (2,189,196)   (1,803,684)
           
Investing activities:          
Net cash used in investing activities   -    - 
           
Financing activities:          
Proceeds from the issuance of notes payable   1,562,000    1,051,228 
Proceeds from short term advances   12,650    5,618 
Repayments on short term advances   (11,500)   (15,300)
Proceeds from issuance of preferred stock   5    - 
Proceeds from issuance of common stock and units   

740,250

    1,055,829 
Payment against long term loan   (9,263)   (8,989)
Payment against notes payable   (96,000)   (156,500)
Payment against notes payable- related parties   -    (75,000)
Net cash provided by financing activities   

2,198,142

    1,856,886 
           
Net increase in cash   8,946    53,202 
Cash, beginning of year   55,533    41,473 
Cash, end of period  $64,479   $94,675 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $27,022   $25,486 
Cash paid for income taxes  $-   $- 
           
Non Cash Investing and Financing Activities:          
Conversion of notes payable and accrued interest to common stock  $1,108,321   $532,018 
Common stock issued on settlement of debt  $289,675   $- 
Notes payable and accrued interest exchanged for common stock units  $66,367   $- 
Value of stock options granted in satisfaction of deferred compensation  $1,467,311   $- 

 

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   Series B Convertible Preferred Stock   Common Stock   Additional Paid-in   Common Stock Subscription   Retained   Total Shareholder's 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Receivable   Earnings   Deficit 
                                         
Balance December 31, 2016   1,000   $-    -   $-    134,336,637   $13,434   $9,800,553   $(1,570)  $(18,374,283)  $(8,561,866)
                                                   
Private placement units issued for cash   -    -    -    -    28,830,028    2,882    737,368    (12,500)   -    727,750 
Preferred stock issued for cash   4,000    5    -    -    -    -    -    -    -    5 
Shares issued for services   -    -    -    -    3,598,996    359    199,196    -    -    199,555 
Shares issued with lock-up agreements   -    -    -    -    126,618    13    7,517    -    -    7,530 
Shares issued for conversion of notes payable and accrued interest   -    -    -    -    106,110,372    10,610    3,977,803    -    -    3,988,413 
Private placement units issued for conversion of notes payable and accrued interest   -    -    -    -    3,370,041    337    66,029    -    -    66,366 
Shares issued related to debt extinguishment   -    -    -    -    1,565,816    156    86,838    -    -    86,994 
Shares issued for repayment of accrued liabiity   -    -    -    -    6,125,000    613    202,068    -    -    202,681 
Valuation of stock options issued for servces   -    -    -    -    -    -    1,139,403    -    -    1,139,403 
Valuation of warrants issued for services   -    -    -    -    -    -    71,113    -    -    71,113 
Valuation of stock options issued in exchange of deferred compensation   -    -    -    -    -    -    1,467,311    -    -    1,467,311 
Net loss for the period ended September 30, 2017   -    -    -    -    -    -    -    -    (12,579,091)   (12,579,091)
Balance September 30, 2017   5,000   $5    -   $-    284,063,508   $28,404   $17,755,199   $(14,070)  $(30,953,374)  $(13,183,836)

 

See accompanying summary of accounting policies 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 non-invasive electrocuetical 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, 2017 and 2016 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 the twelve month period following the date these consolidated financial statements are issued. The Company has raised approximately $2,302,000 in debt and equity financing for the period January 1, 2017 to September 30, 2017. 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 implemented its business plan to materialize revenues from potential, future, license agreements and has initiated a private placement offering to raise capital through the sale of its common stock,. In addition, management has a commitment from a current lender for a total of $2.7 million in the form of convertible notes. As of September 30, 2017, the Company has received cash funding of $1,562,000 for $1,667,500 of convertible notes under this commitment. This commitment is subject to the Company not taking any variable financing from any other investor or lender. 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.

 

Basic and Diluted Income (Loss) per Share

 

Basic income (loss) per share is computed by dividing the net income (loss) to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period.

 

7
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

Common equivalent shares, consisting of incremental common shares for the three and nine months ended September 30, 2017 issuable upon the exercise of stock options, warrants, and convertible debt have not been included in the diluted earnings per share calculation for the three and nine months ended September 30, 2017 or 2016 because their effect is anti-dilutive.

 

Recently Issued Accounting Pronouncements

 

In August 2014, the FASB issued FASB ASU2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. FASB ASU 2014-15 changes to the disclosure of uncertainties about an entity’s ability to continue as a going concern. These changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. These changes became effective for the Company for the 2016 annual period. Management has evaluated the impact of the adoption of these changes and has determined there will be no material impact on the consolidated financial statements. Subsequent to adoption, this guidance will need to be applied by management at the end of each annual period and interim period therein to determine what, if any, impact there will be on the consolidated financial statements in a given reporting period.

 

In April 2015, the FASB issued ASU No 2015-3, Simplifying the Presentation of Debt Issuance Costs. This update changes the presentation of debt issuance costs in the balance sheet. ASU 2015-03 requires debt issuance costs related to a recognized debt obligation to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU clarified guidance in ASC 2015-03 stating that the SEC staff would not object to a company presenting debt issuance costs related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end. This update is effective for annual and interim periods beginning after December 15, 2015, which required us to adopt these provisions in the first quarter of 2016. This update was applied on a retrospective basis, wherein the balance sheet of each period presented was adjusted to reflect the effects of applying the new guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In November 2015, the FASB issued ASU No 2015-17, Income Taxes (Topic 740). The amendments in ASU 2015-17 change the requirements for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company has early adopted this pronouncement for the fiscal reporting period ended December 31, 2016, and has reclassified the presentation of deferred income taxes in the prior period to conform to the current year classification in the consolidated balance sheets. As a result of the Company having recognized a valuation reserve for the entire deferred tax liability balance at September 30, 2017 and December 31, 2016, there is no impact of the presentation of deferred income taxes in our financial statements.

 

8
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update intends to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new standard affects all entities that hold financial assets or owe financial liabilities. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is evaluating the impact of the adoption of these changes will have on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach.

 

The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

Note 2 – Property, Plant and Equipment

 

The following is a summary of equipment, at cost, less accumulated depreciation at September 30, 2017 and December 31, 2016:

 

   September 30,   December 31, 
   2017   2016 
         
Autos  $64,458   $64,458 
Medical equipment   5,000    5,000 
Other equipment   8,774    8,774 
    78,232    78,232 
Less accumulated depreciation   73,478    62,407 
   $4,754   $15,825 

 

Depreciation expense for the nine months ended September 30, 2017 and 2016 was $11,071 and $11,876, 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, 2017, the Company issued eleven Convertible Notes (“Variable Notes”) totaling $1,667,500 with original terms ranging from six months to one year with interest rates equal to 10%, and a variable conversion rate with a discount of 30% of the Company’s common stock based on the terms included in the Variable Notes. The Variable Notes contain a prepayment option, which enables the Company to prepay the note subsequent to issuance at a premium of 125%.

 

9
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

During the nine months ended September 30, 2017, an investor in the Company’s Variable Notes purchased from another holder of the Company’s Variable Notes an aggregate of $920,000 principal and $39,570 of accrued interest with terms that extended the maturities to one-year and increased the interest rate from 6% to 10% and contains a prepayment option, which enables the Company to prepay the note subsequent to issuance. As a result of this modification, the Company recognized a gain on debt extinguishment of $2,358,919 during the nine months ended September 30, 2017.

 

During the nine months ended September 30, 2017, the Company entered into a settlement agreement with a holder of two $33,000 convertible promissory notes totaling $66,000 in principal and $11,400 accrued interest wherein the Company repaid in full the principal and accrued interest balance with a payment of $90,000. In accordance with FASB ASC 470-50, Debt modifications and Extinguishments, the Company recognized a $58,115 gain on extinguishment of debt in connection with this settlement agreement.

 

The gross amount of all Variable Notes outstanding at September 30, 2017 is $2,495,315.

 

Notes payable to a related party in the aggregate amount of $170,000 were extended.

 

As of September 30, 2017, other notes payable outstanding totaled $974,903, all of which are past maturity.

 

   September 30,   December 31, 
   2017   2016 
         
Notes payable at beginning of period  $3,193,956   $2,333,751 
Notes payable issued   1,667,500    1,776,895 
Default interest added to note payable   -    62,500 
Accrued interest payable added to note payable   39,570    - 
Settlements on note payable   -    (55,000)
Repayments of notes payable in cash   (96,000)   (241,500)
Less amounts converted to stock   (1,164,808)   (682,690)
Notes payable at end of period   3,640,218    3,193,956 
Less debt discount   (920,773)   (1,145,849)
   $2,719,445   $2,048,107 
           
Notes payable issued to related parties  $170,000   $170,000 
Notes payable issued to non-related parties  $2,549,445   $1,878,107 

 

The maturity dates on the notes payable are as follows:

 

   Notes to     
12 months ending,  Related parties   Non-related parties   Total 
             
September 30, 2018  $170,000   $3,470,218   $3,640,218 
   $170,000   $3,470,218   $3,640,218 

 

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, 2018  $7,355 
   $7,355 
      
Current portion  $7,355 
Long term portion  $- 

 

Note 4 - Shareholders’ Deficit

 

Increase in Authorized Shares

 

On January 17, 2017, an increase in authorized capital stock from 250,000,000 shares to 500,000,000 shares became effective.

 

Series B Convertible Preferred Stock

 

At September 30, 2017, there are 50,000 shares of Series B Convertible Preferred Stock (“Series B”) which are authorized and convertible into a like amount of common shares. None of the Series B have been issued or are outstanding at September 30, 2017.

 

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 and discretionary bonuses. 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, 2017, the Company issued 3,598,996 shares of common stock with a value of $195,555 related to these consulting agreements.

 

During the nine months ended September 30, 2017, the Company issued pursuant to two private placement offerings 32,200,069 shares of common stock and the same number of warrants for cash of $727,750 and conversion of notes and accrued interest in the amount of $66,367. The Company also issued 106,110,372 shares of common stock for the conversion of notes and accrued interest of $1,108,321, which resulted in a loss on debt extinguishment of $269,255 during the nine months ended September 30, 2017.

 

Also, during the nine months ended September 30, 2017, the Company issued 126,618 shares of common stock valued at $7,530 related to the extension of outstanding notes and lock-up agreements, 6,125,000 shares of common stock valued at $202,681 for partial repayment of a $175,000 accrued liability in connection with a variable note settlement agreement entered into in December 2016, and 1,565,816 shares of common stock valued at $86,994 for settlement of the principal and interest outstanding on two notes payable.

 

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. During the quarter ended September 30, 2017, the Company issued 4,000 shares of Series AA Preferred Stock to an officer and director of the Company for $4. As of September 30, 2017, there were 5,000 shares of Series AA Preferred Stock outstanding.

 

Warrants

 

During the nine months ended September 30, 2017, in conjunction with the sale of common stock and issuance of notes, the Company issued three and five-year common stock purchase warrants to acquire up to 32,200,069 shares of common stock. These warrants have exercise prices ranging from $0.0165 to $1.00 per share. In addition, during the nine months ended September 30, 2017, the Company issued five-year common stock purchase warrants to acquire up to 1,100,678 shares of common stock valued at $71,113 related to consulting services received by the Company. These warrants have exercise prices ranging from $0.0961 to $0.2669 per share. The balance of all warrants outstanding as of September 30, 2017 is as follows:

 

   Outstanding Warrants 
       Weighted Average 
       Exercise Price 
   Shares   Per Share 
Outstanding at January 1, 2017   9,494,940   $0.33 
Granted   33,300,747   $0.24 
Cancelled   -   $- 
Exercised   -   $- 
Outstanding at September 30, 2017   42,795,687   $0.26 
           
Exercisable at September 30, 2017   42,795,687   $0.26 

 

Stock Options

 

During the nine months ended September 30, 2017, the Company granted stock options to independent contractors exercisable into up to 25,272,305 shares of common stock with exercise prices ranging from $0.0269 to $0.054 per share, lives ranging from three to ten years, and cashless exercise rights and were valued at $1,139,403 using the Black Scholes option pricing model. The stock options vested on grant and were expensed in full during the nine months ended September 30, 2017.

 

12
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

In addition, during the nine months ended September 30, 2017, the Company issued stock options to independent contractors exercisable into up to 67,931,064 shares of common stock in exchange for the conversion of $1,467,311 of deferred compensation due to the independent contractors. These options have an exercise price of $0.0216 per share, a three-year life and cashless exercise rights. These options vested on grant. The balance of all stock options outstanding as of September 30, 2017 is as follows:

 

       Weighted Average   Weighted Average   Aggregate 
       Exercise Price   Remaining Contractual   Intrinsic 
   Options   Per Share   Term (years)   Value 
Outstanding at January 1, 2017   -   $-           
Granted   93,203,369   $0.029           
Cancelled   -   $-           
Exercised   -   $-           
Outstanding at September 30, 2017   93,203,369   $0.029    4.29   $2,674,937 
                     
Exercisable at September 30, 2017   93,203,369   $0.029    4.29   $2,674,937 

 

The following assumptions were used at September 30, 2017 to value the stock options using the Black Scholes option pricing model.

 

   Nine months ended
   September 30, 2017
    
Expected term  1.5 - 5 years
Exercise price  $0.0216 - $0.054
Expected volatility  184% - 190%
Expected dividends  None
Risk-free interest rate  1.23% - 1.79%
Forfeitures  None

 

Note 5 – Related Party Transactions

 

One officer and executive of the Company has entered into note payable agreement with the Company. The balance of notes payable from related parties at September 30, 2017 is $170,000.

 

As of September 30, 2017 and December 31, 2016, the balance of two executive officers and the operations manager deferred compensation is approximately $1,155,794 and $1,861,327, respectively. During the nine months ended September 30, 2017, these individuals converted a total of $660,000 of deferred compensation into three-year stock options exercisable into up to 30,555,555 shares of common stock at an exercise price of $0.0216 per share.

 

From time-to-time executive officers and the operations manager of the Company advance monies to the Company to cover costs. During the nine months ended September 30, 2017, officers advanced $12,650 of funds to the Company of which $11,500 were repaid during the period. The balance of short-term advances due to executive officers of the Company at September 30, 2017 is $6,973.

 

13
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

During the quarter ended September 30, 2017, 4,000 shares of Series AA Preferred Stock was issued to an officer and director of the Company for $4.

 

Note 6 – 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:

 

    Three months ended September 30,    Nine months ended September 30, 
    2017    2016    2017    2016 
Expected term   .01 months - 1 year    1 month - 1 year    .01 months - 1 years    1 month - 2.2 years 
Exercise price   $0.0130-$0.0182    $0.0690-$0.1051    $0.0085-$0.0385    $0.0645-$0.28 
Expected volatility   189%-200%    255%-276%    189%-201%    220%-276% 
Expected dividends   None    None    None    None 
Risk-free interest rate   1.05% to 1.31%    0.52% to 0.59%    1.03% to 1.31%    0.45% to 1.06% 
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 eight 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.

 

14
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

The following table presents changes in the liabilities with significant unobservable inputs (level 3) for the nine months ended September 30, 2017:

 

   Derivative 
    Liability 
Balance December 31, 2016  $1,927,752 
      
Issuance of convertible debt   5,781,056 
Settlements by debt extinguishment   (7,437,183)
Change in estimated fair value   6,945,434 
      
Balance September 30, 2017  $7,217,059 

 

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

 

The Company's balance sheet contains derivative 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 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.

 

15
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

The following table presents balances in the liabilities with significant unobservable inputs (Level 3) at September 30, 2017:

 

   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, 2017                    
Derivative liability  $-   $-   $7,217,059   $7,217,059 
Total  $-   $-   $7,217,059   $7,217,059 

 

Note 7 – Commitments and Contingencies

 

Legal Matters

 

The Company may become involved in various legal proceedings in the normal course of business.

 

On September 19, 2017, the Company entered into a Settlement Agreement with Kodiak Capital Group, LLC for $80,000 relative to the 2015 EPA Agreement.

 

Note 8 – Subsequent Events

 

Subsequent to September 30, 2017, an aggregate of 74,026 shares of restricted common stock were issued for services.

 

Subsequent to September 30, 2017, the Company issued 10,160,435 shares of its restricted common stock and 9,697,473 warrants pursuant to a Private Placement Memorandum and private offerings for $429,990 in cash and $30,000 of converted notes.

 

Subsequent to September 30, 2017, an aggregate of 10,320,197 shares of restricted common stock were issued on the conversion of $160,000 of principal and $7,600 of accrued interest pursuant to one Variable Note.

 

Subsequent to September 30, 2017, an aggregate of 252,676 shares of restricted common stock were issued pursuant to leak out agreements.

 

Subsequent to September 30, 2017, the Company cancelled 196,078 shares of restricted common stock priced at $12,500 previously issued under a subscription agreement and 196,078 warrants to purchase the Company’s common stock.

 

Subsequent to September 30, 2017, the Company received $195,000 of funding in connection with $210,000 of convertible notes issued.

 

Subsequent to September 30, 2017, the Company issued a final tranche of 600,000 shares as full repayment on the $175,000 accrued liability in connection with a variable note settlement agreement entered into in December 2016.

 

As a result of these issuances the total number of shares outstanding is 305,274,764.

 

16
 

 

 

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 non-invasive electrocuetical 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, 2016 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.

 

17
 

 

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.

 

Recently Issued Accounting Pronouncements

 

In August 2014, the FASB issued FASB ASU2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. FASB ASU 2014-15 changes to the disclosure of uncertainties about an entity’s ability to continue as a going concern. These changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. These changes became effective for the Company for the 2016 annual period. Management has evaluated the impact of the adoption of these changes and has determined there will be no material impact on the consolidated financial statements. Subsequent to adoption, this guidance will need to be applied by management at the end of each annual period and interim period therein to determine what, if any, impact there will be on the consolidated financial statements in a given reporting period.

 

In April 2015, the FASB issued ASU No 2015-3, Simplifying the Presentation of Debt Issuance Costs. This update changes the presentation of debt issuance costs in the balance sheet. ASU 2015-03 requires debt issuance costs related to a recognized debt obligation to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU clarified guidance in ASC 2015-03 stating that the SEC staff would not object to a company presenting debt issuance costs related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end. This update is effective for annual and interim periods beginning after December 15, 2015, which required us to adopt these provisions in the first quarter of 2016. This update was applied on a retrospective basis, wherein the balance sheet of each period presented was adjusted to reflect the effects of applying the new guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

18
 

 

In November 2015, the FASB issued ASU No 2015-17, Income Taxes (Topic 740). The amendments in ASU 2015-17 change the requirements for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company has early adopted this pronouncement for the fiscal reporting period ended December 31, 2016, and has reclassified the presentation of deferred income taxes in the prior period to conform to the current year classification in the consolidated balance sheets. As a result of the Company having recognized a valuation reserve for the entire deferred tax liability balance at September 30, 2017 and December 31, 2016, there is no impact of the presentation of deferred income taxes in our financial statements.

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update intends to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new standard affects all entities that hold financial assets or owe financial liabilities. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is evaluating the impact of the adoption of these changes will have on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach.

 

The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

Results of Operations

 

Three Months ended September 30, 2017 and 2016

 

   Three Months Ended September 30,   Favorable     
   2017   2016   (Unfavorable)   % 
                 
Operating expenses  $1,035,628   $1,310,748   $275,120    -21.0%
                     
Loss from operations   (1,035,628)   (1,310,748)   275,120    -21.0%
                     
Other income (expense)   (5,636,476)   (908,093)   (4,728,383)   520.7%
                     
Net income (loss)  $(6,672,104)  $(2,218,841)  $(4,453,263)   200.7%

 

Operating Expenses

 

Our operating expenses for the three months ended September 30, 2017 were approximately $1,035,628 compared to $1,310,748 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, 2017, 576,660 shares of common stock were issued for consulting services valued at $15,720 as compared to 4,513,514 shares of common stock being issued for consulting services valued at $663,519, during the corresponding period of the previous year.

 

19
 

 

Other Income (Expense)

 

Other income (expense) for the quarter ended September 30, 2017 was expense of $5,636,476 compared to expense of $908,093 for the quarter ended September 30, 2016. 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 had a loss on extinguishment of debt of $58,197 during the quarter ended September 30, 2017 compared to a loss of $42,507 during the quarter ended September 30, 2016. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluation of these derivative liabilities.

 

Nine months ended September 30, 2017 and 2016

 

   Nine Months Ended September 30,   Favorable     
   2017   2016   (Unfavorable)   % 
                 
Operating expenses  $3,770,929   $4,778,109   $1,007,180    21.1%
                     
Loss from operations   (3,770,929)   (4,778,109)   1,007,180    21.1%
                     
Other income (expense)   (8,808,162)   202,268    (9,010,430)   NM 
                     
Net loss  $(12,579,091)  $(4,575,841)  $(8,003,250)   -174.9%

 

Operating Expenses

 

Our operating expenses for the nine months ended September 30, 2017 were approximately $3,770,929 compared to $4,778,109 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, 2017, 3,598,996 shares of common stock were issued for consulting services valued at $199,555 as compared to 9,346,760 shares of common stock being issued for consulting services valued at $2,291,373, during the corresponding period of the previous year. Also, during the nine months ended September 30, 2107 the company issued stock options valued at $1,139,403 to independent contractors.

 

Other Income (Expense)

 

Other income (expense) for the nine months ended September 30, 2017 was expense of $8,808,162 compared to income of $202,268 for the nine months ended September 30, 2016. 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 had income on extinguishment of debt of $2,175,459 during the nine months ended September 30, 2017 compared to a loss of $435,625 during the nine months ended September 30, 2016. We anticipate continued large fluctuations in other income (expense) as a result of quarterly re-evaluation of these derivative liabilities.

 

20
 

 

Liquidity and Capital Resources

 

   As of   Favorable 
   September 30, 2017   December 31, 2016   (Unfavorable) 
Working Capital               
                
Current assets  $155,479   $302,854   $(147,375)
Current liabilities   13,189,069    8,721,324    (4,467,745)
Working capital deficit  $(13,033,590)  $(8,418,470)  $(4,615,120)
                
Long-term debt  $155,000   $159,221   $4,221 
                
Stockholders' deficit  $(13,183,836)  $(8,561,866)  $(4,621,970)
                

 

   Nine Months Ended September 30,   Favorable 
   2017   2016   (Unfavorable) 
Statements of Cash Flows Select Information            
             
Net cash provided (used) by:               
Operating activities  $(2,189,196)  $(1,803,684)  $(385,512)
Investing activities  $-   $-   $- 
Financing activities  $2,198,142   $1,856,886   $341,256 

 

   As of   Favorable 
   September 30, 2017   December 31, 2016   (Unfavorable) 
Balance Sheet Select Information               
                
Cash  $64,479   $55,533   $8,946 
                
Accounts payable and accrued expenses  $3,238,237   $4,727,247   $1,489,010 

 

Since inception and through September 30, 2017, the Company has raised approximately $7.8 million in equity and debt transactions. These funds have been used for the operations of the Company to acquire and 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 has implemented its business plan to materialize revenues from potential, future, license agreements and has initiated a private placement offering to raise capital through the sale of its common stock. In addition, management has a commitment from a current lender for a total of $2.7 million in the form of convertible notes. As of September 30, 2017, the Company has received cash funding of $1,562,000 for $1,667,500 of convertible notes under this commitment. This commitment is subject to the Company not taking any variable financing from any other investor or lender. 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. Our cash on hand at September 30, 2017 was approximately $64,479. This will be insufficient to fund operations if additional capital is not raised. The Company raised an aggregate of approximately $2,302,000 through the sale of equity and debt securities during the nine months ended September 30, 2017.

 

21
 

 

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, 2017 our disclosure controls and procedures were not effective at the reasonable assurance level:

 

22
 

 

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, 2017. 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, a consultant has 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.

 

23
 

 

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

 

Number of        
Common Shares   Source of    
Issued   Payment  Amount 
 576,660   Services  $15,720 
 12,500   Note extension  $386 
 12,655,161   Cash  $255,000 
 23,024,976   Conversion of notes  $660,743 
 3,625,000   Settlement of Liabilities  $103,730 

 

The above issuances of securities during the three months ended September 30, 2017 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.

 

24
 

 

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 7, 2017 Endonovo Therapeutics, Inc.  
     
  By:  /s/ Alan Collier
    Alan Collier
   

Chief Executive Officer

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

 

25