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 June 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 [  ] Smaller reporting company [X]
(do not check if smaller reporting company)  

 

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 August 11, 2016, there were 122,945,087 shares of common stock, $0.0001 par value issued and outstanding.

 

 

 

     
 

 

ENDONOVO THERAPEUTICS, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

June 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. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 20
Item 4. Controls and Procedures. 20
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings. 21
Item 1A. Risk Factors. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 22
Item 3. Defaults Upon Senior Securities. 22
Item 4. Mine Safety Disclosures 22
Item 5. Other Information. 22
Item 6. Exhibits. 22
     
SIGNATURES 23

 

  2  
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Endonovo Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

    June 30, 2016     December 31, 2015  
    (Unaudited)     (Audited)  
             
ASSETS                
Current assets:                
Cash   $ 78,688     $ 41,473  
Other current assets     -       336,233  
Total current assets     78,688       377,706  
                 
Property, Plant and Equipment, net     23,740       31,657  
                 
    $ 102,428     $ 409,363  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued expenses   $ 4,379,989     $ 3,990,185  
Short term advances, related parties     3,823       3,605  
Notes payable, net of discounts of $256,653 as of June 30, 2016 and $321,961 as of December 31, 2015     1,213,848       1,261,790  
Notes payable - related parties     181,800       245,000  
Derivative liability     1,170,547       3,973,542  
Current portion of long term loan     12,212       12,031  
                 
Total current liabilities     6,962,219       9,486,153  
                 
Notes payable, net of discounts of $407,276 as of June 30, 2016 and $477,346 of December 31, 2015     225,224       27,654  
Long term loan     10,465       16,616  
Acquisition payable     155,000       155,000  
Total liabilities     7,352,908       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; 117,900,657 and 104,803,401 shares issued and outstanding as of June 30, 2016 and December 31, 2015     11,790       10,479  
Additional paid-in capital     8,154,911       3,773,642  
Stock subscriptions     (1,570 )     (1,570 )
Accumulated deficit     (15,415,611 )     (13,058,611 )
Total shareholders’ deficit     (7,250,480 )     (9,276,060 )
    $ 102,428     $ 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     Six Months Ended  
    June 30,     June 30,  
    2016     2015     2016     2015  
                         
Revenues, net   $ -     $ 1,920     $ -     $ 4,665  
Cost of goods sold     -       1,338       -       2,162  
Gross profit     -       582       -       2,503  
                                 
Operating expenses     2,065,241       494,266       3,467,361       927,820  
Loss from operations     (2,065,241 )     (493,684 )     (3,467,361 )     (925,317 )
                                 
Other income (expense)                                
Change in fair value of derivative liability     1,574,082       29,446       2,598,684       29,446  
Gain (loss) on extinguishment of debt     (526,156 )     -       (393,118 )     -  
Interest expense, net     (436,222 )     (93,485 )     (1,095,205 )     (142,007 )
      611,704       (64,039 )     1,110,361       (112,561 )
                                 
Loss before income taxes     (1,453,537 )     (557,723 )     (2,357,000 )     (1,037,878 )
                                 
Provision for income taxes     -       -       -       -  
                                 
Net loss   $ (1,453,537 )   $ (557,723 )   $ (2,357,000 )   $ (1,037,878 )
                                 
Basic and diluted loss per share   $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.01 )
Weighted average common share outstanding:                                
Basic and diluted     111,155,833       97,996,920       108,861,547       91,364,222  

 

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)

 

    Six Months ended June 30,  
    2016     2015  
Operating activities:                
Net loss   $ (2,357,000 )   $ (1,037,878 )
Adjustments to reconcile net loss to cash used in operating activities:                
Depreciation and amortization expense     7,917       7,280  
Fair value of equity issued for services     1,738,629       4,251  
Non-cash expenses paid in debt issuance     123,000       -  
Gain (loss) on extinguishment of debt     393,118       -  
Non-cash interest expense     438,587       49,145  
Amortization of note discount     456,763       3,521  
Change in fair value of derivative liability     (2,598,684 )     (29,446 )
Changes in assets and liabilities:                
Other current assets     346,133       2,000  
Accounts payable and accrued expenses     423,495       622,305  
Net cash used in operating activities     (1,028,042 )     (378,822 )
                 
Investing activities:                
Net cash used in investing activities     -       -  
                 
Financing activities:                
Proceeds from the issuance of notes payable     477,000       290,500  
Proceeds from issuance of notes payable- related parties     -       50,000  
Proceeds from short term advances     5,618       73,205  
Repayments on short term advances     (15,300 )     (12,850 )
Proceeds from issuance of common stock and units     818,329       220  
Payment against long term loan     (5,970 )     (4,845 )
Payment against notes payable     (151,220 )     -  
Payment against notes payable- related parties     (63,200 )     -  
Net cash provided by financing activities     1,065,257       396,230  
                 
Net increase in cash     37,215       17,408  
Cash, beginning of year     41,473       988  
Cash, end of period   $ 78,688     $ 18,396  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 19,124     $ 6,112  
Cash paid for income taxes   $ -     $ 500  
                 
Non Cash Investing and Financing Activities:                
Conversion of notes payable and accrued interest to common stock   $ 499,441     $ 328,138  

 

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                 Additional     Common Stock           Total  
    Preferred Stock     Common Stock     Paid-in     Subscription     Retained     Shareholder’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     -       -       2,786,621       279       710,972       -       -       711,251  
Shares issued for services     -       -       4,833,246       483       1,627,371       -       -       1,627,854  
Shares issued with notes payable extensions and lock-up agreement     -       -       259,917       27       110,748       -       -       110,775  
Shares issued for conversion of notes payable and accrued interest     -       -       3,681,492       368       1,500,886       -       -       1,501,254  
Private placement units issued for conversion of notes payable and accrued interest     -       -       969,653       97       284,270       -       -       284,367  
Warrants issued with notes payable     -       -       -       -       40,000       -       -       40,000  
Net loss for the period ended June 30, 2016     -       -       -       -       -       -       (2,357,000 )     (2,357,000 )
Balance June 30, 2016     1,000     $ -       117,900,657     $ 11,790     $ 8,154,911     $ (1,570 )   $ (15,415,611 )   $ (7,250,480 )

 

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 June 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 $1.3 million in debt and equity financing for the period January 1, 2016 to June 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 six month period ending June 30, 2016, the Company had 7,536,612 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 the six month period ended June 30, 2016. For the six months ended June 30, 2015, the Company had no dilutive securities.

 

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 June 30, 2016 and December 31, 2015:

 

    June 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     54,492       46,575  
    $ 23,740     $ 31,657  

 

Note 3 - Notes Payable and Long Term Loan

 

Notes Payable

 

During the six months ended June 30, 2016, the Company issued two Convertible Notes (“Variable Notes”) with original terms of one year and nine months, and one year, respectively, and with interest rates ranging from an add-on interest equal to 10% of the initial principal, and 10%, respectively, 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 contains a prepayment option which enables the Company to prepay the note for a period of 0-180 days, and six months , respectively, subsequent to issuance at a premium of 125%. In addition, 300,000 two-year warrants at $0.81 were issued with and to the holder of one of the Variable Notes. The gross amount of these Variable Notes outstanding is $505,000 as of June 30, 2016.

 

  8  
 

 

Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

    June 30, 2016     December 31, 2015  
             
Notes payable at beginning of period   $ 2,333,751     $ 1,377,416  
Notes payable issued     605,000       1,586,250  
Repayments of notes payable in cash     (188,200 )     (138,000 )
Less amounts converted to equity     (465,750 )     (491,915 )
Notes payable at end of period     2,284,801       2,333,751  
Less debt discount     (663,929 )     (799,307 )
    $ 1,620,872     $ 1,534,444  
                 
Notes payable issued to related parties   $ 181,800     $ 245,000  
Notes payable issued to non-related parties   $ 1,439,072     $ 1,289,444  

 

The maturity dates on the notes payable are as follows:

 

      Notes to        
12 months ending,     Related parties     Non-related parties     Total  
                     
June 30, 2017     $ 181,800     $ 1,470,501     $ 1,652,301  
June 30, 2018     $ -     $ 632,500     $ 632,500  
June 30, 2019     $ -     $ -     $ -  
      $ 181,800     $ 2,103,001     $ 2,284,801  

 

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 June 30,     Six months ended June 30,  
    2016     2015     2016     2015  
                         
Expected term     9 months - 3 years       9 months - 1 year       9 months - 3 years       9 months - 1 year  
Exercise price     $0.0659-$0.28       $0.30-$0.52       $0.0659-$0.28       $0.30-$0.52  
Expected volatility     221%-276%       158%-181%       199%-276%       158%-181%  
Expected dividends     None       None       None       None  
Risk-free interest rate     0.45% to 1.06%       0.28%     0.45% to 1.06%       0.28%
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 June 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     903,587  
Settlements by debt extinguishment     (1,107,898 )
Change in estimated fair value     (2,598,684 )
         
Balance June 30, 2016   $ 1,170,547  

 

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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:

 

Maturity dates of long term debt

 

Twelve months ending,        
June 30, 2017   $ 12,212  
June 30, 2018   $ 10,465  
    $ 22,677  
         
Current portion   $ 12,212  
Long term portion   $ 10,465  

 

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 six months ended June 30, 2016, the Company issued 1,500,000 shares of common stock with a value of $759,800 related to these consulting agreements.

 

During the six months ended June 30, 2016, the Company issued pursuant to a private placement offering 3,756,274 shares of common stock and the same number of warrants for cash of $711,250 and conversion of notes and accrued interest in the amount of $284,367. The Company also issued 566,327 shares of common stock for cash of $107,079 and 3,681,492 shares of common stock for the conversion of notes and accrued interest in the amount of $1,501,254.

 

Also, during the six months ended June 30, 2016, the Company issued 259,917 shares of common stock valued at $110,775 related to the extension of outstanding notes and lock-up agreements. The Company also issued 3,333,246 shares of common stock with a value of $868,054 for services provided to the Company.

 

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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 June 30, 2016, there were 1,000 shares of Series AA Preferred stock outstanding.

 

Warrants

 

During the six months ended June 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 4,056,274 shares of common stock. These warrants have exercise prices ranging from $0.195 to $0.81 per share. The balance of all warrants outstanding as of June 30, 2016 is as follows:

 

      Outstanding Warrants  
            Weighted Average  
            Exercise Price  
      Shares     Per Share  
Outstanding at January 1, 2016       -     $ -  
Granted       4,056,274     $ 0.55  
Cancelled       -     $ -  
Exercised       -     $ -  
Outstanding at June 30, 2016       4,056,274     $ 0.55  
                   
Exercisable at June 30, 2016       4,056,274     $ 0.55  

 

Note 5 – Related Party Transactions

 

Two officers and executives of the Company have entered into note payable agreements with the Company. $63,200 of principal has been repaid during the six months ended June 30, 2016. The balance of notes payable from related parties at June 30, 2016 is $181,800.

 

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.

 

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.

 

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Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

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 six months ended June 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 June 30, 2016                              
Derivative liability   $ -   $ -     $ 1,170,547     $ 1,170,547  
Total   $ -   $ -     $ 1,170,547     $ 1,170,547  

 

Note 7 – Subsequent Events

 

Subsequent to June 30, 2016, an aggregate of 2,000,000 shares of restricted common stock were issued for services.

 

Subsequent to June 30, 2016, the Company issued 780,916 shares of its restricted common stock and 780,916 Warrants pursuant to a Private Placement Memorandum and private offerings.

 

Subsequent to June 30, 2016, the Company issued 2,263,514 commitment shares of its restricted common stock to Bellridge Capital, LLP pursuant to the terms of the executed Note Securities Purchase Agreement and Equity Line Securities Purchase Agreement.

 

As a result of these issuances the total number of shares outstanding is 122,945,087.

 

Subsequent to June 30, 2016, the following transactions occurred:

 

On July 9, 2016, the Company signed a binding letter agreement (“Letter Agreement”), dated July 8, 2016 for our acquisition of all of the outstanding shares of Rio Grande Neurosciences, Inc. (RGN) from its existing shareholders. The Letter Agreement calls for a purchase price of $30,000,000 for all of the shares of RGN, of which we have paid $500,000 through the delivery of a promissory note (the “Note”) which is due on the earlier of January 8, 2017 or the closing of the acquisition of RGN and bears interest at 7.5%. The balance of the purchase price will be paid as Pursuant to the Letter Agreement, Endonovo will be acquiring RGN for an aggregate purchase price of $30,000,000, consisting of the Note, $1.0 million in cash, approximately $15 million in Endonovo common stock, the assumption by us of $8.5 million in senior secured notes and approximately $5 million in Endonovo common stock warrants. Endonovo will also be committed to paying RGN’s shareholders a 10% royalty on the sale of RGN commercialized products. The Letter Agreement has been approved by the boards of directors of both the Company and RGN and is binding, but subject to the execution of a definitive purchase agreement, shareholder approvals and Endonovo raising additional capital. The parties expect to sign a definitive agreement within the third quarter ending September 30, 2016 and close at the same time or shortly thereafter. The Letter Agreement contemplates a Board of Directors comprised of three designees from RGN and four from us.

 

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Endonovo Therapeutics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

 

The foregoing is only a brief summary of the Letter Agreement and the Note and the reader is referred to the Letter agreement and the Note, which are exhibits to our current report on Form 8-K dated July 9, 2016, for a full understanding of their terms and conditions of those documents.

 

On July 12, 2016, the Company entered into several agreements with Bellridge Capital, LP (“BCLP”) relating to two financing transactions. One transaction is for $1,000,000 of convertible promissory notes and the other is for a $9,000,000 equity line.

 

The $1,000,000 note financing involves 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. BCLP 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 BCLP. $400,000 principal amount of the Note has been funded, the next tranche of $200,000 will be due in 30 days and the final tranche of $400,000, less the commission fee, will be funded upon the effectiveness of a registration statement that we will file covering the shares of our common stock issuable upon conversion of the notes.

 

The $9,000,000 Equity Line is pursuant to an Equity Line Securities Purchase Agreement (“ELSPA”) which provides for a 3% origination fee also required BCLP to purchase shares of our stock which we will put to BCLP 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. BCLP 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 BCLP, 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 or when BCLP has purchased $9,000,0000 of our stock, whichever is earlier   .

 

In connection with the foregoing financing agreements with BPLP, we also signed a Registration Rights Agreement (the “RRA”) with BCLP which requires us to file a registration statement under the Securities Act of 1933, as amended, at our expense covering the shares issuable on conversion of the notes and upon our exercise of puts. The funds under the ELSPA will not be available to us until 30 days after the registration statement is ordered effective.

 

Aegis Capital Corp. will receive a 10% commission on all funds raised and warrants to purchase 8% of the aggregate number of shares sold under the NSPA and the ELSPA bringing the Company’s net proceeds under the NSPA to $900,000.

 

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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.

 

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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.

 

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 June 30, 2016 and 2015

 

    Three Months Ended June 30,     Favorable        
    2016     2015     (Unfavorable)     %  
                         
Revenue   $ -     $ 1,920     $ (1,920 )     -100.0 %
Cost of revenue     -       1,338       1,338       100.0 %
Gross profit     -       582       (582 )     -100.0 %
                                 
Operating expenses     2,065,241       494,266       (1,570,975 )     317.8 %
                                 
Loss from operations     (2,065,241 )     (493,684 )     (1,571,557 )     318.3 %
                                 
Other income (expense)     611,704       (64,039 )     675,743       1115.0 %
                                 
Net loss   $ (1,453,537 )   $ (557,723 )   $ (895,814 )     160.6 %

 

Revenues

 

We had no revenue for the three months ended June 30, 2016 compared to $1,920 for the three months ended June 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 June 30, 2016 were approximately $2,065,241 compared to $494,266 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 June 30, 2016, 3,931,742 shares of common stock were issued for consulting services valued at $1,200,549 as compared to 1,945,000 shares of common stock being issued for consulting services valued at $1,945, during the corresponding period of the previous year.

 

Other Income (Expense)

 

Other income (expense) for the quarter ended June 30, 2016 was income of $611,704 compared to expense of $64,039 for the quarter ended June 30, 2015. This change was due primarily to a change in valuation of our derivative liabilities, which did not exist as of June 30, 2015, and net of interest expense resulting from the amortization of the discounts on notes payable also, which did not exist as of June 30, 2015. In addition, we incurred a loss on extinguishment of debt of $526,156 for debt conversions during the quarter ended June 30, 2016, which did not exist as of June 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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Six Months ended June 30, 2016 and 2015

 

    Six Months Ended June 30,     Favorable        
    2,016     2,015     (Unfavorable)     %  
                         
Revenue   $ -     $ 4,665     $ (4,665 )     -100.0 %
Cost of revenue     -       2,162       2,162       100.0 %
Gross profit     -       2,503       (2,503 )     -100.0 %
                                 
Operating expenses     3,467,361       927,820       2,539,541       273.7 %
                                 
Loss from operations     (3,467,361 )     (925,317 )     (2,542,044 )     -274.7 %
                                 
Other income (expense)     1,110,361       (112,561 )     1,222,922       1086.5 %
                                 
Net loss   $ (2,357,000 )   $ (1,037,878 )   $ (1,319,122 )     -127.1 %

 

Revenues

 

We had no revenue for the six months ended June 30, 2016 compared to $4,665 for the six months ended June 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 six months ended June 30, 2016 were approximately $3,467,361 compared to $927,820 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 six months ended June 30, 2016, 4,833,246 shares of common stock were issued for consulting services valued at $1,627,371 as compared to 4,249,286 shares of common stock being issued for consulting services valued at $3,375, during the corresponding period of the previous year.

 

Other Income (Expense)

 

Other income (expense) for the six months ended June 30, 2016 was income of $1,110,361 compared to expense of $112,561 for the six months ended June 30, 2015. This change was due primarily to a change in valuation of our derivative liabilities, which did not exist as of June 30, 2015, and net of interest expense resulting from the amortization of the discounts on notes payable also, which did not exist as of June 30, 2015. In addition, we incurred interest expense on the issuance of debt and a loss on extinguishment of debt for debt conversions during the quarter ended June 30, 2016, neither of which existed as of June 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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Liquidity and Capital Resources

 

    As of     Increase  
    June 30, 2016     December 31, 2015     (Decrease)  
Working Capital                        
                         
Current assets   $ 78,688     $ 377,706     $ (299,018 )
Current liabilities     6,962,219       9,486,153       2,523,934  
Working capital deficit   $ (6,883,531 )   $ (9,108,447 )   $ 2,224,916  
                         
Long-term debt   $ 390,689     $ 199,270     $ 191,419  
                         
Stockholders’ deficit   $ (7,250,480 )   $ (9,276,060 )   $ (2,025,580 )

 

    Six Months Ended June 30,     Increase  
    2016     2015     (Decrease)  
Statements of Cash Flows Select Information                        
                         
Net cash provided (used) by:                        
Operating activities   $ (1,028,042 )   $ (378,822 )   $ (649,220 )
Investing activities   $ -     $ -     $ -  
Financing activities   $ 1,065,257     $ 396,230     $ 669,027  

 

    As of     Increase  
    June 30, 2016     December 31, 2015     (Decrease)  
Balance Sheet Select Information                        
                         
Cash   $ 78,688     $ 41,473     $ 37,215  
                         
Accounts payable and accrued expenses   $ 4,379,989     $ 3,990,185     $ 389,804  

 

Since inception and through June 30, 2016, the Company has raised approximately $4.0 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 June 30, 2016 was approximately $78,608. This will be insufficient to fund operations if additional capital is not raised. The Company raised an aggregate of approximately $1.2 million through the sale of equity and debt securities during the six months ended June 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.

 

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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 June 30, 2016 our disclosure controls and procedures were not effective at the reasonable assurance level:

 

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 June 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.

 

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

 

Number of            
Common Shares     Source of      
Issued     Payment   Amount  
  3,931,742     Services   $ 1,200,549  
  39,807     Note extension   $ 19,624  
  1,864,848     Cash   $ 440,054  
  3,774,995     Conversion of notes   $ 1,516,205  

 

The above issuances of securities during the three months ended June 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

 

I tem 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: August 12, 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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