The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
During the quarter ended March 31, 2014, holders of 1% and 11% Convertible Debentures, converted $420,000 into 3,867,000 shares of the Companys common stock. In addition, as part of an exercise of common stock warrants, a Convertible Debenture holder applied $22,000 of accrued interest to the purchase price of 300,000 shares of the Companys common stock.
During the quarter ended March 31, 2013, the Company issued 11% Convertible Debentures totaling $500,000 and recorded $377,088 in discounts on debentures.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include the accounts of Health Enhancement Products, Inc. and its wholly-owned subsidiaries (collectively, the Company). All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Companys management, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. These consolidated financial statements are condensed, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys December 31, 2013 consolidated audited financial statements and supplementary data included in the Annual Report on Form 10-K filed with the SEC on March 31, 2014.
The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2014, or any other period.
The Company had a loss from operations of $778,757 and $535,337 for the three months ended March 31, 2014 and 2013, respectively. In addition, the Company had a working capital deficiency of $5,351,284 and a stockholders deficit of $4,882,910 at March 31, 2014. These factors continue to raise substantial doubt about the Company's ability to continue as a going concern. During the first three months of 2014, the Company raised $284,250 in net proceeds from the issuance of common stock and the exercise of warrants into common stock. There can be no assurance that the Company will be able to raise additional capital.
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Health Enhancement Products, Inc. and its wholly-owned Subsidiaries, Health Enhancement Corporation, HEPI Pharmaceuticals, Inc., WellMetris, LLC, and Zivo Biologic, Inc. All significant intercompany transactions and accounts have been eliminated in consolidation.
Accounting Estimates
The Companys consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. At March 31, 2014, the Company did not have any cash equivalents.
6
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property and equipment consists of furniture, office equipment, and leasehold improvements, and are carried at cost less allowances for depreciation and amortization. Depreciation and amortization is determined by using the straight-line method over the estimated useful lives of the related assets. Repair and maintenance costs that do not improve service potential or extend the economic life of an existing fixed asset are expended as incurred.
Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities.
The Companys financial instruments include cash and cash equivalents, prepaid expenses, miscellaneous receivables, accounts payable and accrued expenses. All of these items were determined to be Level 1 fair value measurements.
The carrying amounts of cash and equivalents, miscellaneous receivables, prepaid expenses, accounts payable, and accrued expenses all approximate fair value because of the short maturity of these instruments.
The Company considers derivative liabilities to be a Level 3 fair value measurement.
Deferred Financing Costs
The Company follows authoritative guidance for accounting for financing costs as it relates to convertible debt issuance cost. These costs are deferred and amortized over the term of the debt period or until redemption of the convertible debentures. Amortization of deferred financing costs amounted to $4,835 and $-0- for the three months ended March 31, 2014 and 2013, respectively.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.
The Company believes its current assumptions and estimates are reasonable and appropriate; however, unanticipated events and changes in market conditions could affect such estimates, resulting in the need for an impairment charge in future periods During the three months ended March 31, 2013, the Company decided that the remainder of the cost of the patents related to its former product ProAlgaZyme should be written off in the amount of $6,234. The decision was based on the lack of revenue generated by this product over the course of the prior year or for the foreseeable future.
7
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104), which superseded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB No. 101). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on managements judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company ceased the sales of its sole product in the fourth quarter of 2011, and therefore recognized no provision for the three months ended March 31, 2014 or March 31, 2013.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred. For the three months ended March 31, 2014 and 2013, no shipping and handling costs were incurred.
Research and Development
Research and development costs are expensed as incurred. The Company accounts for research and development expenses under two main categories.
·
Research Expenses, consisting of salaries and equipment and related expenses incurred for product research studies conducted primarily within the Company and by Company personnel. Research expenses were approximately $0 and $25,000 for the quarters ended March 31, 2014 and 2013, respectively;
·
Clinical Studies Expenses, consisting of fees, charges, and related expenses incurred in the conduct of clinical studies conducted with Company products by independent external entities. External clinical studies expenses were approximately $391,000 and $104,000 for the quarter ended March 31, 2014 and 2013, respectively.
Stock Based Compensation
We account for stock-based compensation in accordance with FASB ASC 718,
Compensation Stock Compensation.
Under the provisions of FASB ASC 718, stock-based compensation cost is estimated at the grant date based on the awards fair value and is recognized as expense over the requisite service period. The company generally issues grants to its employees, consultants and board members. At the date of grant, the company determines the fair value of the stock option award and recognizes compensation expense over the requisite service period. The fair value of the stock option or warrant award is calculated using the Black Scholes option pricing model.
During the three months ended March 31, 2014, 50,000 common stock warrants valued at $7,228 were granted to the CFO for services rendered and 50,000 common stock warrants valued at $15,144 vested. During the three months ended March 31, 2013, 25,000 common stock warrants valued at $6,037 vested. As a result of these grants and vestings, the Company recorded compensation expense of $22,372 and $6,037 for these periods, respectively.
The fair value of warrants was estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions:
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Expected volatility
|
121.33% to 128.35%
|
|
114.66% to 131.97%
|
Expected dividends
|
0%
|
|
0%
|
Expected term
|
3 5 years
|
|
3 years
|
Risk free rate
|
.41% to .44%
|
|
.25% to .27%
|
8
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Based Compensation
(continued)
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Companys employee warrants have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion the existing models may not necessarily provide a reliable single measure of the fair value of its employee options.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing the Companys net income (loss) by the weighted average number of common shares outstanding during the period presented. Diluted income (loss) per share is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of warrants and conversions of debentures. Potentially dilutive securities as of March 31, 2014, consisted of 28,257,091 common shares from convertible debentures and 15,350,539 common shares from outstanding warrants. Potentially dilutive securities as of March 31, 2013, consisted of 22,864,667 common shares from convertible debentures and 15,280,209 common shares from outstanding warrants. For the three months ended March 31, 2013 diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.
Advertising / Public Relations Costs
Advertising/Public Relations costs are charged to operations when incurred. These expenses were $12,853 and $7,461 for the three months ended March 31, 2014 and 2013, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation (FDIC) limit of $250,000 at times during the year.
Reclassifications
Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.
Future Impact of Recently Issued Accounting Standards
In July 2012, the Financial Accounting Standards Board (FASB) issued ASU No. 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment
(ASU 2012-02). ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is aired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 is not expected to have a material impact on the Companys financial position or results of operations.
Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period
9
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2014 and December 31, 2013 consists of the following:
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
|
|
(Unaudited)
|
|
|
Furniture and fixtures
|
$
|
20,000
|
$
|
20,000
|
Equipment
|
|
80,000
|
|
80,000
|
|
|
|
|
|
|
|
100,000
|
|
100,000
|
Less accumulated depreciation and amortization
|
|
(12,500)
|
|
(6,250)
|
|
|
|
|
|
|
$
|
87,500
|
$
|
93,750
|
Depreciation and amortization was $6,250 and $13,203 for the three months ended March 31, 2014 and 2013 respectively.
NOTE 4 - DEFINITE-LIFE INTANGIBLE ASSETS
The Companys definite-life intangible assets are amortized, upon being placed in service, over the estimated useful lives of the assets, with no residual value. Amortization expense for the three months ended March 31, 2014 and 2013 were $- 0 - and $- 0 -, respectively. As of March 31, 2013, the Companys management decided to take an impairment charge of $6,234 representing the unamortized basis of the patents related to the creation and production of its product, ProAlgaZyme which is no longer producing revenue. The write off of the impairment loss has been included in General and Administrative Expenses on the Statement of Operations for the three months ended March 31, 2013.
NOTE 5 CONVERTIBLE DEBT
HEP Investments, LLC
The Company and HEP Investments, LLC, a Michigan limited liability company (Lender), entered into the following documents, effective as of December 1, 2011, as amended through March 17, 2014: (i) a Loan Agreement under which the Lender has agreed to advance up to $4,050,000 to the Company, subject to certain conditions, (ii) a Convertible Secured Promissory Note in the principal amount of $4,050,000 (Note) and (iii) a Security Agreement, under which the Company granted the Lender a security interest in all of its assets and (iv) an IP security agreement under which the Company and its subsidiaries granted the Lender a security interest in all their respective intellectual properties, including patents, in each case order to secure their respective obligations to the Lender under the Note and related documents. In addition, the Companys subsidiaries have guaranteed the Companys obligations under the Note. The Company has also made certain agreements with the Lender which shall remain in effect as long as any amount is outstanding under the Loan. These agreements include an agreement not to make any change in the Companys senior management, without the prior written consent of the Lender. Two representatives of the Lender will have the right to attend Board of Director meetings as non-voting observers.
Amounts advanced under the Note are (i) convertible into the Companys restricted common stock according to the following schedule: (A) $2,660,000 at the lesser of $.12 per share or a 25% discount off of the ten day trailing quoted price of the common stock in the over the counter (OTC) market, (B) $640,000 at the lesser of $.22 per share or a 25% discount off of the ten day trailing quoted price of the common stock in the over the counter (OTC) market, and (C) $750,000 at the lesser of $.30 per share or a 25% discount off of the ten day trailing quoted price of the common stock in the over the counter (OTC) market, (ii) bear interest at the rate of 11% per annum and (iii) must be repaid as follows: accrued interest must be paid on the first and second anniversary of the Note and unpaid principal not previously converted into common stock must be repaid on the second anniversary of the Note, with the provision that the first Note of $500,000 due on December 1, 2013 has been extended to June 1, 2014. The Company determined that the modification of these Notes was not a substantial modification in accordance with ASC 470-50, Modifications and Extinguishments. The Note may be prepaid upon sixty days written notice, provided that the Company shall be required to pay a prepayment premium equal to 5% of the amount repaid.
10
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE DEBT (continued)
The Venture Group, LLC
On January 27, 2012, the Company and The Venture Group, LLC, a Maryland limited liability company (Venture Group), entered into the following agreements, effective as of January 26, 2012: (i) a Subscription Agreement under which the Lender has agreed to advance $500,000, (ii) a Subordinated Convertible Promissory Note in the principal amount of $500,000 (Note); and (iii) (a) a Security Agreement, under which the Company granted the Lender a subordinated security interest in all of its assets and (b) an IP security agreement under which the Company granted the Lender a subordinated security interest in all its intellectual properties, including patents, to secure its obligations to the Lender under the Note and related documents. Amounts advanced under the Note are (i) secured on a subordinated basis by all the Companys assets, (ii) convertible into the Companys restricted common stock at $.12 per share, (iii) bear interest at the rate of 11% per annum (payable on the first and second anniversary of the Note (unless earlier paid off), in cash or stock, at the Companys option), and (iv) unpaid principal not previously converted into common stock must be repaid on the second anniversary of the Note (January 27, 2014).
On October 30, 2013, the Venture Group converted $150,000 of the $500,000 convertible debenture into 1,250,000 shares of the Companys common stock.
On February 18, 2014, Venture Group converted the remaining $350,000 of the convertible debenture into 2,916,667 shares of the Companys common stock.
Other Debt
On February 7, 2014, the holders of $70,000 of 1% convertible debentures converted their debentures into 950,000 shares of the Companys common stock.
During the three months ended March 31, 2014, the Company and the Note Holder and significant shareholder of the Company extended the remaining notes due for an additional six months. The Company determined that the modification of these Notes was not a substantial modification in accordance with ASC 470-50, Modifications and Extinguishments.
|
|
|
|
|
Convertible debt consists of the following:
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
|
|
(Unaudited)
|
|
|
1% Convertible notes payable, net of unamortized discount of $22,526 and $5,546 respectively, due at various dates ranging from September 2014 to May 2015
|
$
|
288,074
|
$
|
375,054
|
|
|
|
|
|
11% Convertible note payable - HEP Investments, LLC, a related party, net of unamortized discount of $1,768,940 and $2,235,217, respectively, due at various dates ranging from June 2014 to December 2015
|
|
2,281,060
|
|
1,814,783
|
|
|
|
|
|
11% Convertible note payable, Venture Group, net of unamortized discount of $29,707
|
|
-
|
|
320,293
|
|
|
2,569,134
|
|
2,510,130
|
Less: Current portion
|
|
1,558,727
|
|
1,619,319
|
|
|
|
|
|
Long term portion
|
$
|
1,010,407
|
$
|
890,811
|
Amortization of the debt discount on the remaining notes was $479,003 and $174,559 for the three months ended March 31, 2014 and 2013, respectively.
11
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DERIVATIVE LIABILITY
On March 18, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $377,088 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.22, an expected volatility of 160.96% over the remaining 0.71 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .25%.
On April 10, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $616,040 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.35, an expected volatility of 151.37% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .24%.
On April 16, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $518,756 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.30, an expected volatility of 151.72% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .24%.
On April 29, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $856,410 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.47, an expected volatility of 153.70% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .20%.
On May 7, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $916,028 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.50 an expected volatility of 153.46% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .22%.
On July 15, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $504,699 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.32 an expected volatility of 146.56% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .34%.
On July 25, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $418,790 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.46 an expected volatility of 147.03% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .32%.
On September 30, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $479,502 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.45 an expected volatility of 139.26% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .33%.
On October 28, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $214,525 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.37 an expected volatility of 134.91% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .33%.
12
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DERIVATIVE LIABILITY (continued)
On December 18, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $185,438 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.33 an expected volatility of 134.11% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .34%.
On December 30, 2013, in connection with the HEP Investments agreement, as a result of reaching certain funding thresholds which entitled HEP Investments to additional shares of common stock, the Company was required to record an additional derivative liability of $248,701 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.42 an expected volatility of 133.07% over the remaining 2.00 year contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .39%.
On December 31, 2013, the Company valued the derivative liability at $8,036,239 utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.39, an expected volatility of 133.09% over the remaining contractual lives of the note ranging from 0.90-1.93 years, an annual rate of dividends of 0%, and a risk free rate of .38%. The fair value of the derivative increased by $1,674,135 which has been recorded in the statement of operations for the twelve months ended December 31, 2013.
On March 31, 2014, the Company valued the derivative liability at $
2,671,529
utilizing the Black-Scholes method of valuation using the following assumptions: closing stock price of $.17, an expected volatility of 145.45% over the remaining 1.27 years contractual life of the note, an annual rate of dividends of 0%, and a risk free rate of .44%. The fair value of the derivative decreased by $
5,364,711
which has been recorded in the statement of operations for the year ended March 31, 2014.
NOTE 7 - STOCKHOLDERS DEFICIT
Stock Issuances
During the three months ended March 31, 2014, the Company received proceeds of $100,000 from the issuance of 500,000 shares of common stock and $184,250 from the exercise of 1,650,000 common stock warrants.
Board of Directors fees
As compensation for serving as a member of the board of directors, the Company granted warrants to purchase 50,000 shares of common stock to Philip M. Rice (CFO and a Director) in January, 2013, at an exercise price of $.12 per share. The warrants have a term of three years and vested or will vest as follows: 12,500 vested on the grant date and the remaining 37,500 shall vest quarterly (12,500 per quarter). The warrants were valued at $10,381 using the Black Scholes pricing model relying on the following assumptions: volatility 131.97%; annual rate of dividends 0%; discount rate 0.27%. In addition, Mr. Rice received $10,000 for each annual term served, paid in cash quarterly.
As compensation for serving as a member of the board of directors, the Company granted warrants to purchase 50,000 shares of common stock to Thomas K. Cox in June, 2013, at an exercise price of $.40 per share. The warrants have a term of three years and vested or will vest as follows: 12,500 vested on the grant date and the remaining 37,500 shall vest quarterly (12,500 per quarter). The warrants were valued at $15,873 using the Black Scholes pricing model relying on the following assumptions: volatility 145.67%; annual rate of dividends 0%; discount rate 0.25%. In addition, Mr. Cox receives $10,000 for each annual term served, paid in cash quarterly.
13
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS DEFICIT
Board of Directors fees (continued)
As compensation for serving as a member of the board of directors, the Company granted warrants to purchase 50,000 shares of common stock to John B. Payne in July, 2013, at an exercise price of $.38 per share. The warrants have a term of three years and vested or will vest as follows: 12,500 vested on the grant date and the remaining 37,500 shall vest quarterly (12,500 per quarter). The warrants were valued at $17,187 using the Black Scholes pricing model relying on the following assumptions: volatility 143.37%; annual rate of dividends 0%; discount rate 0.25%. In addition, Mr. Payne receives $10,000 for each annual term served, paid in cash quarterly.
As compensation for serving as a member of the board of directors, the Company granted warrants to purchase 50,000 shares of common stock to John Gorman in November, 2013, at an exercise price of $.36 per share. The warrants have a term of three years and vested or will vest as follows: 12,500 vested on the grant date and the remaining 37,500 shall vest quarterly (12,500 per quarter). The warrants were valued at $14,053 using the Black Scholes pricing model relying on the following assumptions: volatility 141.53%; annual rate of dividends 0%; discount rate 0.33%. In addition, Mr. Gorman receives $10,000 for each annual term served, paid in cash quarterly.
The company recorded Directors Fees of $74,401 during the twelve months ended December 31, 2013, representing the fees expensed and the value of the vested warrants described above.
As compensation for serving as a member of the board of directors, the Company granted warrants to purchase 50,000 shares of common stock to Philip M. Rice (CFO and a Director) in January, 2014, at an exercise price of $.38 per share. The warrants have a term of three years and vested or will vest as follows: 12,500 vested on the grant date and the remaining 37,500 shall vest quarterly (12,500 per quarter). The warrants were valued at $13,460 using the Black Scholes pricing model relying on the following assumptions: volatility 121.33%; annual rate of dividends 0%; discount rate 0.44%. In addition, Mr. Rice will receive $10,000 for each annual term served, paid in cash quarterly.
The company recorded Directors Fees of $15,144 during the three months ended March 31, 2014, representing the fees expensed and the value of the vested warrants described above.
A summary of the status of the Companys warrants is presented below.
|
|
|
|
|
|
March 31, 2014
|
December 31, 2013
|
|
Number of
|
Weighted Average
|
Number of
|
Weighted Average
|
|
Warrants
|
Exercise Price
|
Warrants
|
Exercise Price
|
|
|
|
|
|
Outstanding, beginning of year
|
16,900,539
|
$ 0.17
|
16,365,209
|
$ 0.17
|
Issued
|
100,000
|
0.28
|
4,820,330
|
0.18
|
Exercised
|
(1,650,000)
|
0.13
|
(2,785,000)
|
0.16
|
Expired
|
-
|
|
(1,500,000)
|
0.32
|
Outstanding, end of period
|
15,350,539
|
$ 0.17
|
16,900,539
|
$ 0.17
|
14
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS DEFICIT (continued)
Stock Issuances (continued)
Warrants outstanding and exercisable by price range as of March 31, 2014 were as follows:
|
|
|
|
|
|
|
Outstanding Warrants
|
Exercisable Warrants
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Contractual
|
Exercise
|
|
Average
|
Range of
|
Number
|
Life in Years
|
Price
|
Number
|
Exercise Price
|
|
|
|
|
|
|
$ 0.12
|
3,439,439
|
1.66
|
$ 0.12
|
3,439,439
|
$ 0.12
|
0.125
|
5,502,097
|
0.88
|
0.125
|
5,502,097
|
0.125
|
0.15
|
1,300,000
|
0.69
|
0.15
|
1,300,000
|
0.15
|
0.17
|
50,000
|
5.00
|
0.17
|
12,500
|
0.17
|
0.22
|
477,004
|
2.37
|
0.22
|
477,004
|
0.22
|
0.25
|
3,782,000
|
2.52
|
0.25
|
3,782,000
|
0.25
|
0.30
|
350,000
|
4.27
|
0.30
|
350,000
|
0.30
|
0.33
|
250,000
|
4.25
|
0.33
|
250,000
|
0.33
|
0.36
|
50,000
|
1.59
|
0.36
|
25,000
|
0.36
|
0.38
|
100,000
|
2.54
|
0.38
|
87,500
|
0.38
|
0.40
|
50,000
|
2.19
|
0.40
|
50,000
|
0.40
|
|
|
|
|
|
|
|
15,350,539
|
1.73
|
|
15,275,539
|
$ 0.17
|
NOTE 8- COMMITMENTS AND CONTINGENCIES
Employment Agreement
The Companys Chief Executive Officer, Andrew Dahl, is serving under the terms of an employment agreement dated December 16, 2011. Under the agreement Mr. Dahl serves as CEO for one year terms, subject to automatic renewal, unless either party terminates the Agreement on sixty days notice prior to the expiration of the term of the agreement. Mr. Dahl receives an annual base salary of $240,000. In addition, Mr. Dahl is entitled to monthly bonus compensation equal to 2% of the Companys revenue, but only to the extent that such bonus amount exceeds his base salary for the month in question. In addition, Mr. Dahl will be entitled to warrants having an exercise price of $.25 per share, upon the attainment of specified milestones as follows: 1) Warrants for 500,000 shares upon identification of bio-active agents in the Companys product and filing of a patent with respect thereto, 2) Warrants for 500,000 shares upon entering into a business contract under which the Company receives at least $500,000 in cash payments, 3) Warrants for 1,000,000 shares upon the Company entering into a co-development agreement with a research company to develop medicinal or pharmaceutical applications (where the partner provides at least $2 million in cash or in-kind outlays), 4) Warrants for 1,000,000 shares upon the Company entering into a co-development agreement for nutraceutical or dietary supplement applications (where the partner provides at least $2 million in cash or in-kind outlays), 5) Warrants for 1,000,000 shares upon the Company entering into a pharmaceutical development agreement. As of March 31, 2014, none of the milestones referred to had been achieved and there had been no notice of contract termination.
15
HEALTH ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8- COMMITMENTS AND CONTINGENCIES (continued)
Miscellaneous Receivable
On May 1, 2013, the Company, through its legal counsel, sent a notice to the landlord at 7740 E. Evans, Scottsdale, AZ that it expected a timely return of the $118,466 security deposit. On June 14, 2013, the landlord filed a Complaint in the State Court of Arizona that the Company owed the landlord in excess of $210,000 in damages in addition to the $118,466 security deposit related to the property at 7740 E. Evans, Scottsdale, AZ. On July 24, 2013, the Company filed an Answer and Counter Claim disputing the claim and asking the court for relief in the amount of $118,466.
NOTE 9 - SUBSEQUENT EVENTS
HEP Investments
On April 15, 2014, the Company and HEP Investments, LLC, a Michigan limited liability company (Lender), entered into the following documents, effective as of April 15, 2014: (i) Fourth Amendment to Loan Agreement under which the Lender has agreed to advance an additional $500,000 up to a total of $4,550,000 to the Company, subject to certain conditions, and (ii) an Amended and Restated Senior Secured Convertible Promissory Note. These agreements amend agreements the Company entered into with HEP Investments as previously disclosed.
Other Investment
As of May 6, 2014, the Company received $200,000 from sales of 1,000,000 shares of its common stock.
16